BWB 1013

BUSINESS LAW
TOPIC 5 : LAW OF
AGENCY
BY: PUAN MAZLINA MAHALI

INTRODUCTION
The relevant legislation is Contracts Act 1950 (Part X).
The concept of agency - sometimes it is not possible for a

person to perform all tasks entrusted to her. For example

when a housewife has to look after a few kids and at the
same time she has to purchase groceries and fetch her kids
from school. Unless she gets some assistance from
another person, she will not be able to perform all the
duties smoothly. Assistance from another person in law will
give rise to the creation of an agency law.
The person who seeks assistance is known as the
PRINCIPAL and the person who gave assistance is known
as AGENT.

 Under Section 135 - an agent is the

person who has been authorized to act

for the principal or represent the principal
in dealings with others.
Therefore in an agency, there will be two
contracts created:
a. Contract between the principal and
agent whereby the agent derives his
authority to act on behalf of the Principal;
and
b. Contract between the Principal and third
party through the agent as the medium.

 Section 183 provides that the agent has no

rights or liabilities under the contract. This is

logical since the agent is only acting on behalf
of the Principal.
For example, A authorized B to make an order
of goods for his shop. If B orders goods from C
and did not pay for the goods supplied. C will
sue A since B is only the agent of A. Under the
law of agency, a contract to supply goods is
created between A and C.
Since an agent is not a party to the contract,
Section137 provides that he can be a minor but
the Principal is required to have the full capacity
to create a contract - Section 136

CREATION OF AGENCY
An agency contract is similar to the ordinary

contract except under Section 138, it is

provided that even without a consideration, an
agency contract is still valid and enforceable.
An agency may be created by:
o Express appointment by the Principal;
o Implied appointment by the Principal;
o Ratification by the Principal;
o Necessity;
o Doctrine of estoppel or "Holding out".

EXPRESS APPOINTMENT

Section 140 provides that authorization by the

Principal to appoint an agent may be in oral or in
writing. Therefore no special form is needed to
create an agent so long the Principal has either
orally or in writing expressly authorized the agent
to act on his behalf or to do things for him, an
agency relationship is formed.
However if the agent is authorized to enter into
contract under seal, appointment must be made
under a power of attorney by virtue of Power of
Attorney Act. That means it must be made in
writing and has to comply with the provisions of
Power of Attorney Act.

IMPLIED APPOINTMENT
The law will infer an agency relationship existed by implication under

the following conditions:

a. When the person by words or conduct holds out to another person as
having authority to act for him - Section 140
For example A allows B to order goods on his behalf and A always paid
for the goods, an agency may be implied. In such cases if in the future,
if B order goods for A, then A is bound by the contracts to supply the
goods.
CASE: CHAN YIN TEE V WILLIAM JACKS & CO(M) LTD
Chan & Yong (a minor) were partners in a business. At the meeting
with the supplier Chan held himself out to be Yong's partner. Business
commenced and goods supplied to Yong but it was not paid. The
supplier sues Chan & Yong. Held: Chan has impliedly appointed Yong
as his partner. Therefore he is liable for Yong's act as the Principal for
Yong.

b. Relationship between husband and wife.

When husband and wife live together, the law implies
that the wife is authorized to use her husband's credit
for necessaries suited to their style of living.
But this presumption can be rebutted by the husband
if:
o He has expressly forbade his wife to use his credit; or
o He has expressly warned tradesman not to sell
goods to his wife;
o The allowance given was sufficient and it is not
necessaries for the wife to use her husband's credit;
or
o The order made by the wife is unreasonable taking
into consideration the husband's income at that time.

c. Relationship between partners under the

Partnership Act 1961
Section 7 Partnership Act 1971 provides that
partners are each other agents when contracting
in the course of the partnership business.

AGENCY BY RATIFICATION
Agency by ratification will arise because the agent has done

any of the followings:

An agent who was duly appointed by the Principal but has
exceeded his authority; or
A person who has NO authority at all to act for the Principal
but has acted as if he has been authorized to do the act on
behalf of the Principal.
The legal effect of the above situation is shown in Section
149, where the Principal can either reject the contract totally
since he has not authorized the agent to do anything on his
behalf or he can affirm or accept the contract so made as if
he has given his authority all along.

The act of accepting or affirming the contract is

known as ratification. The act of ratification will
make the contract entered into by the agent
earlier binding on the Principal. That means it
will operate retrospectively.
Section150 provides that the act of ratification
can be express or implied.
Conditions before ratification of contract can be
done:
a. The act or contract must be
unauthorized;
b. The unauthorized act must be lawful.
That means a void contract cannot be
ratified;

c. The agent must at the time of the contract act

on behalf of the Principal - Section 149
CASE: KEIGHLEY MAXTED & CO V DURANT
Facts: agent exceeded his power when ordering
wheat by buying the wheat higher than the
authorized price in his own name. Held: the
Principal cannot be said to have ratified the
agent's contract since at the time of contract did
not profess to act as agent.
d. The agent must have a Principal who is in
actual existence;
e. The Principal must have a contractual capacity
at the time the contract was made and at the
time of ratification - Section136

f. The Principal at the time of ratification have full

knowledge of all material facts;
g. The Principal must ratify the whole contract or
act. He cannot accept only the part which is
advantageous to him and reject the rest
-Section 152
h. Ratification must be made within reasonable
time;
CASE: METROPOLITAN ASYLUM BOARD V
KINGHAM - the ratification was done in one
week after the agent has entered into a contract
to buy eggs was held too late.
i. Ratification must not injure third party - Section
153 see also illustration of Section 153

AGENCY BY NECESSITY
Section 142 provides that during emergency an agent has authority
to do all such acts for the purpose of protecting the Principal from
loss. This act must be reasonable and not to get any profit.
Before any agency of necessity can be created, the following
conditions must be fulfilled:
a. Section 142 - it is impossible to get instruction from principal;
CASE: SPRINGER V GREAT WESTERN RAILWAY CO
Facts: Tomatoes shipped by ship from New Jersey to Covent
Garden. Bad weather and tomatoes were bad. Agent did not
communicate with principal before selling the tomatoes locally.
Held: No agency by necessity arises since the agent failed to
communicate with the principal even though they could have done
so.

b. Agent's action is necessary to prevent any loss

to the principal;
CASE: GREAT NORTHERN RAILWAY CO V
SWAFFIELD
Facts: In this case, the defendant has put his
horse on to the plaintiff's train, to be sent to a
destination agreed by both parties. Upon arrival
at the destination, there was no one to take the
horse. The station master didn't know the
defendant's address, directed the horse to be
put in a stable. The railway company later
claimed from the defendant the charges of the
stable.
Held: The plaintiff has acted as an agent by
necessity in this case.
c. Agent has acted in good faith.

AGENCY BY ESTOPPEL
Generally a person is not bound by a contract made without his

authority.
However if the principal holds out to another third party by words
or conduct and as a result the third party believes that the person
is an agent of the principal; the principal will be estopped from
denying that the agent has no authority to act on his behalf.
Section 190 provides that the doctrine of estoppel or holding out
is also known as apparent or ostensible authority.
For example if A tells C in front of B that he is B's agent and B did
not deny that statement. B, later, cannot deny that A is his agent if
C sells goods to A, believing A to be B's agent. The contract is
binding on B as principal of A.

APPOINTMENT OF SUB AGENT

General rule - in a relationship between agent

and principal the concept of delegates non

potest delegare is applicable.
Delegatus non potest delegare means a
delegate (agent) cannot delegate.
The rationale - the duty of an agent is personal.
Section 143 states that an agent cannot lawfully
employ another to perform acts which he has
expressly or impliedly undertaken to perform
personally unless by ordinary custom of trade
or sub agent.

DUTIES OF AGENT
When the contract of agency is silent on the terms, the

A.
B.

C.

D.
E.
F.

rights and duties of agent is specified in Section164 178

Main duties are as follows:
To obey the principal's instructions - Section164;
In the absence of instructions from principal, to act
according to customs which was practiced at the place
where he carries on his work - Section 164;
To exercise care and diligent in carrying out his duties
and to use such skill as he possesses - Section165
-Case: KEPPEL V WHEELER
To render proper accounts when demanded by the
principal - Section 166;
To pay the principal all sums received on his behalf Section 171;
To communicate with the principal - Section 167

Not to let his own interest conflict with his duty

as agent - Section169 provides that the
principal is entitled to recover from the agent
any benefit which he may have obtained from
the contract. Case: WONG MUN WAI V
WONG THAM FATT
H. Not to make any secret profit out of the
performance of his duty.
In the case of INDUSTRIES AND GENERAL
MANAGER MORTGAGE CO V LEWIS,
secret profit refers to bribe or any secret
commission paid on top of the agreed
remuneration agreed between the agent and
principal. Once it is established that an agent
received a secret profit, the law presumes that
he had been influenced by the payment to the
detriment of the principal. It is not necessary to
prove corrupt motive of the agent.
G.


o
o

If there is a secret profit, the principal can take any

of the following actions:
If principal knows about it and consent to it, the
agent can keep the profit. See Section 168
If the principal does not agreeable to the fact that
agent is taking secret profit, principal may
repudiate the contract - Section 168
Principal may recover the secret profit from the
agent under Section 169
CASE: THIAN KIONG HWA V ANDREW H
CHONG - Facts: Plaintiff bought a flat from the,
defendant's company. Plaintiff appointed the
defendant as agent to sell the flat for RM45,000.
Defendant sold the flat for RM54,000. The
difference was kept by the defendant's company.
Held: The plaintiff is entitled to recover the
difference because the defendant has breached his
duty as an agent.

o
o

Principal may refuse to pay commission to agent.

CASE: ANDREWS V RAMSAY
Facts: The plaintiff appointed the defendant as his
agent to sell his property with 50 pound as the
commission. Agent sold the property and
received 100 pound as deposit. He gave 50
pound to the principal and with the consent of the
principal keep the other 50 pound as commission.
Later he found that the purchaser also gave 20
pound as a commission. Plaintiff sued to recover
the 20 pound and 50 pounds.
Held: The plaintiff can recover both the sums.
Principal may dismiss the agent on ground of
breach of duty.
Principal may sue agent and third party for
damages.

I.
J.

Not to disclose confidential information or documents

entrusted to him by the principal.
Not to delegate his duty.
Exceptions: the agent may delegate his duty under the
following circumstances:

Where the principal approves the delegation of

authority;

Where it is presumed from the conduct of the parties

that the agent would have power to delegate his
authority;

Where the customs of the trade or business permits

delegation;

Where the nature of the agency is such that

delegation of authority to another person is
necessary to complete the business;

In case of necessity or unforeseen emergency, for

example, illness of the agent;

Where the act to be done is purely ministerial

clerical and does not involve the exercise of
discretion.

DUTIES OF PRINCIPAL
The duties of a principal to his agent are

provided in Section 175 to 178

The main duties are:
To pay to the agent the agreed
commission/commission;
Not to willfully prevent the agent from
earning his commission;
To indemnify or reimbursed any
expenses in the exercise of his duties
as agent.

AGENT'S AUTHORITY
A contract entered into by agent will bind

the principal if he is acting within the

limits of his authority from the principal.
Limit of the agent's authority can be
divided into two:
Actual authority;
Apparent or ostensible authority,

ACTUAL AUTHORITY
To

enter into a contract specifically authorized by the

principal.
Authorization is given in express term e.g the letter of
appointment as agent stated that he has power to order
stationary for the office not more than RM10,000.00.
Authorization may also be implied from the nature of
the agent's activities such as A is appointed as agent
for B to run the branch in Kedah and the principal
instructed him to ensure that the branch can generate
profit. Consent is given to be deemed to A to make
contracts with third party.

OSTENSIBLE AUTHORITY
When the principal represent to another person

with whom the agent deals that he has given

power to the agent to act on his behalf.
As a result an agent with limited actual authority
can be held in practice to have a more
extensive authority.
Conditions before apparent authority can bind
the principal for any contracts entered into by
him with third party:
There must be a representation or holding
out by the principal;
Representation must be one of fact;
Third party must rely on that representation

EFFECTS OF CONTRACT MADE

BY AGENT
Before discussing the effect of contract made by agent, it is better

to distinguish between the various categories of principal:

A "named" principal - is one whose name has been disclosed to
third party by the agent. The third party knows that the agent is
acting for a known principal.
A "disclosed" principal - is one whose existence is disclosed to
third party by the agent but whose identity is unknown.
An "undisclosed" principal - is one whose existence as well as
identity is not known to the third party at the time of the contract.
It is only after the contract has been made that he discovers that
the agent is in reality acting for a principal.

NAMED PRINCIPAL
Section 183 - the agent incurs no right
or liability under the contract. He is not
a party to the contract.
Section 179 -the principal alone can
be sue or be sued by the third party
provided the agent act within his
authority in making the contract.

DISCLOSED PRINCIPAL
Section 183(b) - Agent incurs liability
when the agent did not disclose the
name of the principal.
Section 186 - where the agent is
personally liable, a person dealing
with him may hold either him or his
principal, or both of them liable.

UNDISCLOSED PRINCIPAL
This

doctrine operates when an agent has

authority to bind the principal but neither
the identity nor the existence of the
principal is disclosed.
It is important that the agent is acting
within the scope of his authority because
the principle of ratification does not operate
under the doctrine of undisclosed principal.

TERMINATION OF AGENCY
Section 154 - 163 deals with the

termination of an agency relationship.

It may be terminated :
o by act of the parties; and
o by operation of law.

BY ACT OF THE PARTIES

May be terminated by mutual consent of the parties
Section 154 - Revocation by the principal or
renunciation of the agency by the agent.
Section 160 - revocation and renunciation may be
express or implied in the conduct of the parties e.g
illustration of Section 160 implied revocation when
A has given authority for B to let out his house but
afterwards lets it himself so hat B's authority is
revoked by implication.

 Section 159 - agent can give reasonable notice

when the agency is for indefinite duration.

What is reasonable depends on the facts of the
case.
CASE: SOHRABJI V ORIENTAL SECURITY
ASSURANCE
3 and a half months was inadequate to
terminate a 50 years agency. Court said 2 years
would have been reasonable notice.
CASE: SYARIKAT JAYA V STAR
PUBLICATION (M) SDN BHD
6 months notice is adequate to terminate a sole
agency agreement.

 Power of principal to revoke subject to:

Section 155 - where the agent has interest in

the property which forms the subject matter
of the agency, the agency cannot, in the
absence of an express contract be
terminated of such interest - A gives
authority to B to sell his land and from the
proceeds to pay A's debt to B. A cannot
simply terminate the agency of B.
Section 157 - principal cannot revoke the
agent's authority after it has been partly
exercised.
Section 161 provides that revocation takes
effect when it was made known to the agent.

BY OPERATION OF LAW
Section

154 - states that an agency is terminated when the

business of agency has completed. It simply means that
agency is terminated when the transaction that has been
undertaken is performed.
When the period fixed in the agency contract has expired.
Section 154 - an agency is terminated when the principal or
agent died It is effective when it comes to the notice of the
surviving party.
Section 162 - insanity either the principal or agent since a
person of unsound mind cannot validly entered into a contract.
Section 154 - by insolvency or bankruptcy of the principal.

 By happening of an event which renders the

agency unlawful. This falls within the doctrine of

frustration of contract.
CASE: STEVENSON V AKTIENGESELLS
CHAFT FUR CARTONAGEN INDUSTRIE Agency contract was terminated when the
principal becomes an enemy due to an
outbreak of war.
Section 163 provides that termination of an
agent also ends the authority of sub agent
appointed by the agent.
EFFECT:
The agent cannot bind the principal in
transactions that he may have entered into
with third parties. He will be personally liable.

END OF TOPIC 5
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