Conditions and Application of Law of Agency

1. Express appointment This happens when the principal expressly appoints a person to be his agent. This could be done in two ways:

a) oral

b) in writing

2. Implied appointment Implied appointment may be created under three situations:

a) When a person by his word or conduct holds out another person as having authority to act for him

b) Relationship between husband & wife

c) Relationship between partners

3. Ratification (Approval) Agency by ratification can happen only if it falls under these two situations:

a) Agent who has been appointed but has exceeded his authority when he entered into a contract with a third party.

b) A person who has no authority to act for the principal but he acted as if he has the authority to enter into a contract with third party. According to Section 149 of Contract Act, if either one of these two situations involve, the principal has two choices i. e. : to reject the contract or to accept the contract. When he accepts the contract, it is known as ‘ratification’.

Conditions of a Valid Ratification

a) The contract done by agent was without authority or exceeding authority.

b) The contract recognized by law.

c) The agent must act as agent for the principal not in his own name.

d) The principal must actually exist when the contract was made.

e) The principal must have contractual capacity.

f) The principal must have knowledge of all material facts.

g) The principal must ratify the whole contract.

h) Ratification must be made within a reasonable time

CASES: Metropolitan Asylum Board v Kingham & Sons Grover & Grover v Mathew i) Ratification must not injure or affect the interest of a third person.

4. Agency by Necessity According to Section 142 of Contract Act, a person may become an agent although he is not appointed. When this situation happens, that person is known as agent by necessity. Therefore, an agency by necessity can be created by three conditions where:- a) It is impossible to get the principal’s instructions. b) The agent action is necessary to prevent loss to the principal. This happen when the principal put the agent to be in charge of the goods. c) The agent has acted in a good faith.

5. Agency by Estoppel Section 190 of the Contracts Act 1950:

a) It happens when the principal allows a third party to believe that a person is the agent of the principal.

b) The principal can make a third party to believe so through his conduct or word.

c) When this happen, the principal is estopped from refusing to accept that a person is his agent.

Example: Ahmad tells Ali, in the presence of Mina that Ahmad is Mina’s agent and Mina does not deny this statement. Mina cannot later refuse to accept Ahmad as her agent if Ali sells goods to Ahmad believing hi, to be her agent and later claims price from Mina. DUTIES OF AN AGENT TO HIS PRINCIPAL The duties of an agent to his principal are governed by Sections 164 to 178 of the Contracts Act 1978.

Their duties are:

1. To obey the principal’s instruction (Section 164) An agent must follow the instruction of the principal. If agent does not follow, it is a breach of agency contract. The agent must bear any loss suffered by the principal due to the agent’s disobedience. An agent has to follow the instruction if it is lawful. Example: The principal (Ahmad) instructed his agent (Naim) to sell his painting for RM100,000. 00. However, Naim sell his painting for RN60,000. 00. Here Mr Naim has breache. Section 164 of Contracts Act 1950 i. e. it is the agent’s duty to obey the principal’s instruction. He should be made liable for the loss of RM40,000. 00 suffered by his principal.

2. To act according to custom where instruction is not given (Section 164) When the principal does not give any instruction, agent has to act according to normal standard in doing a business.

3. To exercise care, skill and diligence (Section 165) Agent must use his skill and be diligence about the interest of his principal. Agent must make sure that when he is acting on behalf of the principal, it is important for him to be careful. CASE: Keppel v Wheeler (1927) 1 KB 577 Fact: The Defendant was an agent for Plaintiff.

The agent was asked by the Plaintiff to sell a house. One offer was made by A through an agent and was accepted by the principal subject to a condition. Later, another offer was made by B, but this time the offer is higher than the first offer made by A. The agent did not inform the principal about B’s offer. Principal signed a contract with A. Principal took an action against Agent. The Court held: that the agent was liable because he must use his skill and care for the benefit of his principal. Since agents failed to do so, he was liable to pay the principal the difference between the two offers.

4. To render proper accounts when required by the principal (Section 166) The agent must submit all accounts for the monies and properties that he has received when the principal asks for them.

5. To pay the principal all sums received on behalf of the principal (Section 171) Agent must give the principal the money he received on behalf of the principal. Agent may however, before giving all the monies deduct the followings:- i) advances paid by the agent first, on behalf of the principal; ii) agent’s commissions; iii) agent’s remuneration (salary)

6. To communicate with the principal (Section 167) Agent must try his best to communicate with the principal. He must use all his skill and diligence in giving any information to or getting any instruction from the principal. In the situation where it is impossible e. g in cases of emergencies, the agent must use his discretion to the best interest of the principal.

7. Agent must not let his own interest to conflict with his duty Agent must do duty for the interest of his principal. Agent must not allow his interest to go against the interest of his principal.

CASE: Wong Mun Wai v Wong Tham Fatt and Anor (1987) 2 MLJ 249 Fact: The Agent (Defendant) sold the principal’s land below the market price to the agent’s wife. The Court held: The agent has failed in his duty on two grounds:- i) He sold the Plaintiff’s land below the market price. ii) He sold it to his wife without telling it to the principal. The court gave his decision based on the fact that the agent had a duty to act in a good faith to protect the interest of his principal and must not do anything that would be conflicting with the interest of the principal.

8. Not to make any secret profit out of the performance of his duty. What is secret profit? It may mean: bribe or payment of a secret commission by a third party and any financial advantage the agent receive by third party on top of commission or salary that has been agreed by the agent and principal. If there is a secret profit, there are actions that could be taken by the principal. They are:- a) If the principal knows about it, and consent to it, the agent can keep the profit. (Section 168) b) If the principal does not like it, the principal may repudiate the contract that has been entered by the agent on his behalf. (Section 168) c) Principal may recover the bribe from the agent. (Section 169).

CASE: Tam Kong Hwa v Andrew S. H Chong (1974) 2 MLJ 188 Plaintiff bought a flat from the Defendant’s company. Plaintiff then authorized the Defendant as the agent to sell the flat for RM45,000. 00. The Defendant sold the flat for RM54,000. 00. The difference RM9000 was kept by the Defendant’s company. The court held: that the Plaintiff has the right to recover the RM9000 because the Defendant has breached his duty as an agent. d) The principal may refuse to pay commission or remuneration to the agent (Section 173)

CASE: Andrew v Ramsay and Co (1903) 2KB 635 The Plaintiff had appointed the Defendant as his agent to sell his property. The Plaintiff agreed to give the agent 50 pound as commission. The agent sold the property to a purchaser and received 100 pound as deposit of the property. The agent gave 50 pound to the principal and with the consent of the principal kept 50 pound as the commission due to him. The Principal later found out that the purchaser has also gave 20 pound to the agent as commission. The Principal then sue the agent to recover the 20 pound commission given by the purchaser and 50 pound commission he has given to the agent. The court held that the principal succeeded in recovering both the commissions.

e) The principal may dismiss the agent on the ground of breach of duty. f) Principal may sue the agent and third party for damages. This is for any loss he suffered due to entering the contract. 9. Not to disclose confidential information or documents entrusted to him by his principal. Not to tell other parties about any information or document entrusted to him by his principal. 10. DELEGATUS NON PROTES (means an agent cannot employ others to do his job. Not to delegate his authority Agent must not ask another person to perform his duty. The agent must perform the duty asked by the principal on his own.

The relationship between the principal and the agent is personal where the principal has put his trust in the agent he selects. Therefore, the agent cannot shift the authority by employing another person to act. However, there are exceptions to this rule. An agent may delegate his authority to another in the following circumstances:- a) Where the principal approves the delegation of authority CASE: De Bussche v Alt (1878) Facts: The principal appointed an agent in China to sell a ship at certain price. However, the agent was unable to sell the ship so he sought the principal’s approval to appoint sub agent to sell the ship in Japan.

Held: There was no breach of the agent’s duty in appointing a sub agent because there was an express consent to such delegation. b) Where it is presumed from the conduct of the parties that the agent would have power to delegate his authority. c) Where custom of the trade or business permits delegation d) In case of necessity or unforseen emergency e. g. : illness of agent DUTIES OF A PRINCIPAL TO HIS AGENT (Sections 175-178) The duties of a principal to his agent include:-

1. To pay commission or remuneration to the agent. The principal has to pay the agent his commission or remuneration as agreed in the contract between them. The agent will lose his right to remuneration if the agent is guilty of misconduct in the business of agency. (Section 173)

2. Not to willfully prevent or hinder the agent from earning his commission When a principal has appointed a person to be his agent, he cannot employ a second agent to do the same act as the first agent. This is to protect the first agent from not getting the commission that has been promised to him by the principal.

3. To indemnify and reimburse the agent for acts done in the exercise of his duty. The principal has the duty to indemnify the agent for all losses and liabilities that the agent incurred while he performs his duty.


Sections 154 to 163 of Contract Act provides for: An agency may be terminated in the following situations:

1)By act of the parties

2)By operation of law

1) By Act of the parties An agency contract may be terminated by mutual consent or by unilateral revocation by the principal or unilateral renunciation by the agent at any time by giving reasonable notice.

2) Termination by Operation of Law. An agency may be revoked by operation of law in any of the following circumstances:-

a) Termination by performance The contract of agency came to an end when the agent has performed the contract.

b) Termination upon expiry of the period fixed in the contract of agency.

c) Upon the death of the principal or agent. An agency came to an end when the principal or the agent dies.

d) When the principal or agent has become insane

e) When the principal or agent has been declared bankrupt

f) Termination by frustration Upon happening of an event which renders the agency unlawful, the agency may be terminated.

CASE: Stevenson v Aktiengesellschaf Fur Cartonnagen Industries [1918] An outbreak of war made principal an enemy alien.