CHAPTER 13 LAW OF AGENCY

13.1 Introduction
It is not uncommon that one will seek help of another to act for his behalf to do something, such as to
purchase or sell goods. This is very common in the commercial field whereby business transactions are
done through the agents. In these cases, the person who authorizes other to act is called the Principal and
the other person who acts on behalf of his principal is called the Agent.

Agency is a relationship which arises when the principal authorizes the agent to act on his behalf and the
agent agree to do so. Generally, the relationship arises out of an agreement between a principal and an
agent. Its most important effect, inter alia, is that it enables the agent to make a contract on behalf of his
principal and a third party. Therefore in any agency relationship there are in effect 2 contracts: the contract
between the principal and the third party and the contract between the principal and the agent.

In Malaysia, the law of agency is governed by Part X of the Contracts Act 1950 and the common law.

13.2 Distinguish between Agent and Commercial Agent

We must distinguish between the meaning of agent in a legal sense and in commercial sense.

The commonly used phrase in commercial sense such as sole agent or authorized agent bears a different
meaning from a legal sense. It is not necessarily an agent to carry a strict legal sense. It merely means
that the sole agent holds a franchise of the manufacturer of certain goods. Such a party, though termed as
agent is in reality a principal himself. He does not bring a third party, such as the manufacturer into a legal
relationship. He is directly responsible and liable to the contracting party for any defects and warranty of the
goods sold.

13.3 Who can be agent and principal?

The phrase agent and principal are defined in s 135 of the Contracts Act 1950. An agent is 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.

Under s 136, any person who is not a minor and of sound mind can act as a principal and employ an agent.
Under s 137, anyone who is not a minor and of sound mind can act as an agent for a principal. Section 138
further provides that no consideration is necessary to create an agency.

13.4 Creation of Agency

An agency may arise in many forms, either expressly or impliedly from the circumstances and conducts of
the parties. Generally, an agency may arise in the following ways:
a) Agency by agreement (actual authority)
i) Express authority
ii) Implied authority

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 b) Agency without agreement
i) Apparent (or ostensible) authority
ii) Usual authority
iii) Authority of necessity

c) Agency by ratification

The agency by agreement provides actual authority to the agent to act on his behalf. However, even if there
is no agency agreement, the law may attribute an agent to a person notwithstanding that the principal has
not consented to his appointment. Authorities arise from such operation of law are commonly known as
apparent authorities, as compared to the actual authority by agreement.

13.4.1 Express Authority

An agents actual authority is commonly conferred by express appointment. At common law, no formality is
required. Oral appointment suffices even where the agent is appointed to make a contract which has to be
in writing. In KGN Jaya Sdn Bhd v Pan Reliance Sdn Bhd (1996) 1 MLJ 233, the Court of Appeal held that
the law does not require that agency agreement must be in writing.

The extent of an agents express authority depends on the true construction of the words of the appointment.
If these words are vague or ambiguous, the principal may be bound even though the agent, in good faith,
interprets them in a sense not intended by the principal.

13.4.2 Implied Authority

The very existence of agency may be implied, either from conduct or from the relationship of the parties.

13.4.2.1 Implied by Conduct

An agency relationship may arise where one party, by his conduct or words, hold out another person as
having authority to act for him. Section 140 provides that an authority is said to be implied when it is to be
inferred from the circumstances of the case; and things spoken or written, or the ordinary course of dealing,
may be accounted circumstances of the case. See also the illustration to s 140.

Therefore if a person allows another person to order goods on his behalf and habitually pays for them, an
agency may be implied. In Chan Yit Tee v William Jacks and Co. (1964) MLJ 290, Yong (who is a minor)
and Chan are partners of a trading company who ordered goods from the plaintiff. During meeting with the
plaintiff, Chan holds out to be Yongs partner. Goods were supplied to Yong and the court held that Chan is
liable for the debts as Chan has held out for Yong to be his agent.

13.4.2.2 Implied from the Relationship

Agencies may arise from the relationship of the parties, for example, agency may arise between a husband
and a wife. Thus, it has been held that a husband who lives with his wife impliedly authorizes her to pledge
his credit for necessary household expenses.

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This authority is not a legal consequence of marriage, but depends on the inference of the fact that the
husband has permitted his wife to pledge his credit as manager of the household (Jensbury v Newbold [1857]
26 LJEx 247). The authority therefore does not arise where there is no household, for example, the parties
live in a hotel (Debenham v Mellon [1880] 6 App Cas 24). But where there is a household, the authority can
arise even though the parties are not married (Blades v Free [1829] 9 B&C 167).

As the authority is based on implied consent, it can be negatived by following ways:

a) The husband expressly forbids his wife to pledge his credit;
b) The husband warns the trade man not to supply goods to his wife on his credit; or
c) His wife was given adequate housekeeping allowance.

Section 140 defines what amounts to authority. It provides that an authority is said to be implied when it is to
be inferred from the circumstances of the case; and things spoken or written; or the ordinary course of
dealings.

13.4.3 Apparent Authority (or Ostensible Authority)

When a person represents to a third party that he has authorized an agent to act on his behalf, he may, as
against the third party, not be allowed to deny the truth of the representation; and be bound by the agents
act whether he in fact had authorized it or not. In short, if a principal, by his words or conduct, leads a third
party to believe that his agent has authority to act for him, such as to enter into a contract, then the agent is
said to have apparent authority from his principal notwithstanding that the principal has never consented to it.

Apparent authority may arise in 2 situations:

a) Under s 190 of the Contracts Act 1950, when an agent has, without authority, done acts to third
party on behalf of his principal, the principal is bound by those acts if he has by his words or conduct
induced such third party to believe those acts were within the scope of the agents authority. See
illustrations to s 190.
b) Where the agent previously had authority to act, but that authority was terminated by the principal
without notice to third parties.

In the above situations, the principal has caused a third party to believe that the agent has the authority to
act for him.

In Graphic Lines Pte Ltd v Chai Chee Mein (1987) Butterworths Digest Nov, the Singapore court held that
the partners of a night club were bound by the decisions and acts made by their assistant manager who had
placed advertisement for the night club. One of the partners represented to the plaintiff that all
advertisements are to be done through the assistant manager. The plaintiff had relied on this representation
by entering into contract with the assistant manager.

In Summers v Solomon (1857) LR 7, the defendant employed a manager to run a jewelers shop and
regularly paid for jewelry ordered by the manager from the plaintiff for resale in the shop. The manager left
the defendants employment, ordered further jewellery in the defendants name and absconded with it. The
defendant was held liable to pay for his jewellery since his conduct had led the plaintiff to believe that the

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manager had authority to pledge his credit; and he had not informed the plaintiff that the authority had come
to an end.

Before an apparent authority can arise, following conditions must be satisfied:

13.4.3.1 There must be a representation of authority

This may be express but it is more frequently implied, for example:

i) From a course of dealing
ii) From placing an agent in such a position that it is reasonable for third parties to assume that he has
the principals authority to contract [United Bank of Kuwait v Hamoud (1988) 1 WLR 1051]

iii) From the known relationship of the parties e.g. where a retired staff is allowed to deal with
companys issue

In short, the principal has allowed the agent to act for him even though he may not have consented to it.

13.4.3.2 The representation must be of fact

A representation of law does not give rise to apparent authority. Thus a third party cannot rely on the
doctrine of apparent authority if he has read the terms of the agents appointment, but has misconstrued
them, since the construction of a document is a question of law.

13.4.3.3 The representation of authority to act

The representation must be that the agent is authorized to act as agent. Apparent authority does not arise
if a person is represented merely to be the owner of a business or other property but not that he has
authority to act.

13.4.3.4 Made by the Principal

Apparent authority can arise only out of a representation made by the principal, it cannot arise out of a
representation made by some other person, or out of one made by the agent himself. Thus in AG for Ceylon
v Silva (1953) AC 461, a Crown agent untruly represented that he had apparent authority to sell steel plates
which were Crown properties. The Privy Council held that the Crown was not bound by the sale since the
agent had no actual authority, and since apparent authority could not arise out of a representation made by
the agent. Of course, a principal may represent that the agent has authority to make further representations
on his behalf.

13.4.3.5 Made to the third party

The representation must be made to a third party or group of persons. The representation made by the
principal to the agent only is insufficient to give rise to apparent authority.

13.4.3.6 Reliance by the third party

The third party must have relied on the representation or must have been induced by the representation to
deal with the agent in the belief that the principal had authorized the agent to enter into transaction.

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Two conditions need to be satisfied if this requirement is to be proved:
a) The representation must actually be known to the third party and not, for example, contained in a
document which has not actually come to his attention (The Ocean Frost [1986] AC 717).

b) The third party is not allowed to say that he relied on the representation if he knew that it was untrue
(Jacobs v Morris [1902] 1 Ch 816) or that the agent did not have the authority to act. (Overbrook
Estates Ltd v Glencombe Properties Ltd [1974] 3 All ER 511)

13.4.4 Usual Authority

Usual authority arises where the principal is bound and liable for all the acts of the agent which are within the
authority usually confided to an agent of that character, notwithstanding any limitations of such authority
between the principal and the agent.

This type of authority was established in the controversial case of Watteau v Fenwick (1893) 1 QB 346. In
this case, the owner of a public house appointed a manager to run the public house and the license was
taken out in the managers name which appeared outside the door. The manager was expressly forbidden
by the owner to buy cigars on credit. Despite the express restriction, the manager bought the cigar for the
purposes of the business. The court held that the principal was liable because a manager of a public house
would usually have authority to make purchases of that kind, and the seller could rely on such usual authority
in the absence of express knowledge of the restrictions imposed by the principal. Wills J held that "the
principal is liable for all the acts of the agent which are within the authority usually confided to an agent of
that character, notwithstanding limitations, as between the principal and the agent, put upon that authority."
This decision is heavily criticised and doubted, though not entirely overruled in the UK.

Similarly in Brocklesby v Temperance PBS (1895) AC 173, a principal gives his agent documents and
authorizes him to borrow a fixed sum on the security of those documents. However the agent borrowed
more and the principal was held to be liable.

13.4.5 Authority of Necessity

Authority of necessity arises in an emergency situation in which an agent has the authority to act for the
purpose of protecting his principal from any loss notwithstanding that the agent does not have any previous
authorization from that principal. This common law principle was codified in s 142 of the Contracts Act 1950.

In Springer v Great Western Rly (1921) 1 KB 257, It was held that in order to rely on the authority of
necessity, three conditions must be satisfied:
a) It is impossible for the agent to obtain permission from the principal to act;
b) The action of the agent is necessary under the circumstances, to prevent loss to the principal; and
c) The agent must act reasonably in good faith and in the interest of the principal.

13.4.6 Agency by Ratification

A principal may ratify the acts of his agent as if the acts have been performed by this authority.

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Agency ratification may arise in one of the following situations:
a) An agent who was duly appointed has exceeded his authority;
b) A person who has no authority to act for the principal has acted as if he has authority

In the above situations, the principal can either reject the contract since he has not authorized it or to accept
the contract. This is laid down in s 149 of the Contracts Act 1950.

Ratification renders the contract as binding on the principal as if the agent has been properly authorized. It
also operates retrospectively and dates back to the time when the original contract was made by the agent
and not from the date of the ratification by the principal.

Ratification may be expressed or may be implied in the conduct of the person on whose behalf the acts are
done (see s 150 and its illustration). Mere passive acquiescence does not of itself amount to ratification
(Moon v Towers [1860] 8 CB 611).

Ratification is effective only if the following conditions are satisfied:

a) The agent must purport to act on behalf of the principal and not for himself;
b) The principal must have the capacity to ratify; for example, at common law, a corporation cannot
ratify the unauthorized act of its agent in entering into an ultra vires contract;
c) The principal must have been in existence when the act was done;
d) The principal must ratify in time; for example, a contract cannot be ratified after the time fixed for its
performance is passed.

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