Law of Agency

LAW 2013 – COMMERCIAL LAW CHAPTER 4: LAW OF AGENCY

1.0

INTRODUCTION

Agency is a relationship created when one person cannot act by himself and has to appoint someone else to act for him. Law of Agency is governed by Part X, Contract Acts 1950.

Section n 135 of Agency Agency is a relat relation ionshi ship p betwee between n a Princ Principa ipall and his Ag Agent ent.. Sectio Contract Acts 1950 defines Agent as person employed to do any act for another or to represent another in dealings with third persons. Whilst Principal is defines as a person to whom such act is done, or who; so represented, is called the principal. principal. Example :

A appointed B to be his agent to buy goods from C. A = Principal, B = The agent, C = Third party.

Agency relationship creates TWO contracts enforceable enforceable by law i.e. : A contract of agency between Principal and Agent and; A contract of sale between Principal and Third party. • •

In a contract of agency, consideration is not important. Under Section 136 and 137 of Contract Acts 1950 , capacity to be a Principal and Agent are as the capacity to contract i.e. of majority age and sound mind. If Principal appoints a minor to be his agent, Principal cannot claim if any loss incurred under Agent’s action. The contract between them is void contract.

2.0

CREATION OF AGENCY Generally, an agency may be created in the following ways : • • • • •

2.1

conduct of

By express appointment by the Principal By implied appointment by the Principal By ratification by the Principal By necessity By the doctrine of estoppels

Agenc Agency y by by Exp Expres ress s App Appoin ointme tment nt by the Princ Principa ipall Creation can be through expressed in oral or writing or implied from words of both parties.

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2.2

Agency by Implied Appointment by the Principal

2.2.1 When a person by his words or conduct holds out another person as having authority to act for him . If a person allows another to order goods on his behalf and habitually pays for them, an agency may be implied. In such a case, he will be bound by the contracts as if he has expressly authorized.

Case : Chan Yin Tee v William Jack & Co. Facts : Yong, who is a minor, ordered goods for the business. However, another person, Chan used to pay for the goods. In this instance, Chan refused to pay. Held : The court held that, agency relationship exists between Chan and Yong by referring to their conducts and thus, Chan would have to pay for Yong's 2.2.2 Agency relationship between husband and wife A wife can pledge her husband's credit. A wife can use his husband's name to buy goods on credit if the goods is a necessity and suitable for their standard of living.

rebutted if the

The presumption that a wife is the Agent to her husband can be husband can prove: • •

• •

•

He expressly forbids his wife to pledge his credit. He expressly warned the tradesman no to supply his wife with goods on credit. His wife was sufficiently provided with the goods. His wife was given sufficient allowance to buy good without pledging husband's credit. The order was unreasonable with her husband's income even though it was a necessity

If the husband can prove any of this, he need not pay for the goods. The wife will be personally liable.

2.2.3 By the Partnership Act 1961

partnership

Partners are each other's Agents when contracting in the course of the business. 51


2.3

Agency by Ratification An agency by ratification may arise in TWO situations; 1. 2.

An Agent who was appointed exceeded his authority, or A person who had no authority to act but acted as if he has the

authority. Under Section 149 of Contract Acts 1950, it is up to the Principal whether or not to ratify the Agent's action. If the ratifies or approves, agency by ratification may arise. When the Principal accepts and confirms, the contract is known as ratification.

Section 150 of Contract Acts 1950 provides that ratification may be made by express or implied. Case : Waithman v Wakefield Facts : A wife bought goods that are not necessities. Her husband kept the good goods and refused to return the goods to the seller. Held : Husband action is ratification to his wife action. moment of

Ratification will bind the Principal with the contract made by the agent at the ratification.

However, there are EIGHT conditions need to be fulfilled before the Principal ratifies. The conditions are: i. ii. iii.

The act must be unauthorized or Agent has exceeded his authority, The unauthorized act must be recognized by the law (must not an unlawful act), The Agent must expressly acts as an Agent for the Principal at the time of contract. When the Agent use his own name and does not disclose that he is an Agent for a principal, he would be personally liable. Case : Keighley Maxted & Co. v. Durant Facts : Robert (an Agent) bought flour at a price higher than instructed by his Principal in his own name. Held : It was held that his Principal could not ratify Robert's action so he would have to be personally responsible to

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iv.

The Principal must be in existence and have contractual capacity at the time when the Agent made the contract. If the Principal is a minor, he cannot ratify a contract as he does not contractual capacity unless in a certain types of contract i.e. Contract for Necessities.

v.

The Principal must have knowledge about the material facts of the contract in order to ratify it.

Case : Marsh v. Joseph Facts : The ratification was void because the Principal was not aware of the material facts of the contract at the vi. The Principal if he chooses to ratify must ratify the whole contract, not only the part at is beneficial to him. vii. Ratification must be made within reasonable time. viii. Ratification must not injure to third party

2.4

Agency by Necessity

A person can become an Agent by necessity without formal appointment by Principal in emergency case. This is known as agency of necessity as stated Acts 1950. However some kind of in Section 142 of Contract contractual relationship must already exist between them.

Case : Great Northern Railway Co. v. Swaffield Facts : The railway company contracted to carry defendant's horse to a destination. An agent to the defendant should take delivery the destination. However on arrival, there was no one to take delivery, so the station master directed that the horse to be put in a stable. He did not know the defendant or his agent's addresses and had no way of contacting them. The railway company later claimed for the charges of the stable from the defendant but he refused pay. Held : The court held that the station master acted as an Agent of Agency by necessity may be created if the following THREE conditions are met. (Where a person can act as an Agent by necessity)

(1)

The Agent's action is necessary to prevent loss to the

Principal.

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Agency by necessity does not arise if there is no real urgency i.e. where the goods are sold merely because they were an inconvenience to the carrier.

(2) It is impossible for the Agent to communicate and get further instruction from the Principal. In Springer v Great Western Railway Co., the defendant (a railway company) who was supposed to carry the goods to its destination, sold the goods in the middle of the way without trying to communicate with the owner to get further instruction when it was possible to do so. It was held that there was no agency by necessity arose. The owner can claim damages from the defendant, as it was not the Agent.

(3) must be

2.5

The Agent of necessity must act in good faith and his action reasonable in the circumstances.

Agency by Estoppels

Section 190 of Contract Acts 1950 provides that it arise when a person who is without authority or when he is not formally appointed, act as an Agent. But, the Principal is aware of it but does not deny the, authority of the person. The Principal, by his word or conduct allows third party to believe that the person is his Agent. Therefore, he will be estopped from denying the agents authority. Example:

A tells C in the presence of B that A is B’s agent and B does not contradict this statement. B later cannot deny that A is his agent if C sells goods to A, believing him to be B’s agent and later claims for the price.

3.0

RIGHT AND DUTIES OF AN AGENT AND PRINCIPAL

In general, agency created by an agreement between Principal and Agent. Like other contract, the terms applies is as agreed expressly between parties and included in the contract document. If the contract does not expressly provide rights and obligations of parties to the contract, the rights and obligations as provided in Section 164 to 178 of Contract Acts 1950 applies.

3.1

Duties of an Agent to his Principal 3.1.1 Section 164 of Contract Acts 1950

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LAW 2013 – COMMERCIAL LAW CHAPTER 4: LAW OF AGENCY •

To obey the principal's instruction Failure to do so will result in breach of contract and the agent will be liable for any loss suffered by the principal.

Case : Turpin v. Bilton Facts : The agent failed to insure a ship when instructed to do so and the ship was lost. The Principal claimed damages from the Agent. Held : The court held that failure to obey may be treated as breach of contract and the Agent However, an Agent is under no duty to obey instructions of his the instructions are unlawful. In Cohen v Kittel, an to obey the unlawful instructions of his

Principal if Agent is under no duty Principal.

3.1.2 To act according to the customs If there are no instructions from the Principal he has to act in accordance to the trade customs. •

3.1.3 Section 165 of Contract Acts 1950 To exercise care and diligence in carrying out his work and to use such skill as he possesses. •

Case : Keppel v. Veller Facts : An Agent Sold a horse at a lower price when there was a higher offer. Held : The Agent held to be liable because he did not exercise care and diligence in carrying out his duty. He supposed to get the best offer available.

3.1.4 Section 166 of Contract Acts 1950 To render a proper account when required •

handle by the

The account must include all monies, properties and goods agent.

Case : Parker v Mason Facts : It is the duty of an agent to prepare and show a proper account which includes money received by him from illegal or void transaction, when 55


3.1.5 Section 171 of Contract Acts 1950 To pay to the Principal all sums received on his behalf. •

Exceptions are given under Section 171 where an Agent may from the sums received on behalf of

retain or deduct his Principal for:

(i) (ii) (iii)

Any advances made or expenses incurred His commission and other remunerations Section 174 of Contract Acts 1950 - An Agent has the right to retain his Principal's property until his remuneration is paid unless there is a contract to the contrary .

Case : Valla Mall v. Buddu Mall Facts : Court authorized an Agent to retain the property but he has no power to sell the goods unless if it is approved by the Principal.

3.1.6 Section 167 of Contract Acts 1950 To communicate with the Principal. •

An Agent must use all reasonable diligence to communicate and to get the Principal's instruction. Exception is given in emergency case if Agent fails to communicate, he may use his own discretion to safeguard the interest of his Principal: (Springer v Great Western Railway)

3.1.7 Section 168 of Contract Acts 1950 An Agent must not let his personal interest conflicts with his duty •

He cannot become a party in a transaction which is against the Principal's interest. His primary duty is to act solely for the benefit of his Principal. Case : Wong Mung Wai v. Wong Tham Fatt Facts : The first defendant is an Agent to the Plaintiff. He sold the Principal's shares below then market price to his own wife. Held : The Agent (first defendant) was in

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3.1.8 Not to make any secret profit out of the performance of his duty. •

Secret profit is a bribe, any extra payment, secret commission or any financial advantage given by the third party to the Agent. However, if the Principal knows and consent the Agent is entitles to keep the profit as it is no longer a secret. If Principal does not agree, the Principal may :

i. ii. iii. iv. v.

Repudiate the contract made by the Agent disadvantageous to him, Recover the secret profit from the Agent, Refuse to pay commission or other remuneration, Dismiss the Agent for breach of duty, Sue the Agent and third party for any loss.

if

it

is

Case : Mahesan v. Malaysian Government Officers CoOperative Housing Society Ltd. Facts : The court authorized respondent to choose either to recover the secret profit or the real loss because agent is in breach by taking secret commission from

3.1.9 Not to disclose any confidential information and documents entrusted to him by the Principal. 3.1.10 •

Not to delegate his authority An Agent cannot employ another person to do his duty. It is known as maxim “delegates non protest delegare” . It means that a delegate cannot delegate. However, there are exceptions:

i. ii. iii. iv.

When the Principal approves or consents to the delegation of the authority Where it is presumed from the conduct of the parties that the Agent would have power to delegate his authority Where the custom or trade or business permits delegation Where it is necessary to complete the business

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v.

3.2

Where the act to be done is purely ministerial/clerical i.e. preparing document which does not involve the exercise of discretion

Duties of a Principal to His Agent 3.2.1 To pay the Agent commission and other remuneration agreed Case : Facts : though

3.2.2 Not commissions •

to

Tan Chiok Sing v Lian Fatt Sawmill Co. An agent is entitled to reasonable remuneration even the contract between his Principal and

willfully

prevent

the

Agent

from

earning

his

The Principal cannot hire another Agent to compete with the first Agent. However, if it is agreed that the Principal himself may sell the properly and a sale completed by him, he is not bound to pay commission to his Agent.

3.3.3 To indemnify for acts done in the exercise of his authority An agent is entitled to be indemnified by the principal against all losses and liabilities incurred by him in the performance of his duty. •

negligent, he is

Case : Kyall & Evatt v. Lim Kim Keat Facts : The Agent was hired to sell shares. The defendant (Principal) failed to disclose that certain shares cannot be obtained. Agent concluded a contract to sell shares but he could not deliver and suffered loss. The Agent claimed from the Principal the loss. Held : It was held that Agent was entitled to be indemnified for the loss because the Principals neglect of skill, the Principal is legally bound to make compensation to his Agent in respect of that injury. However, if there is fraud, or the Agent acts beyond hid duty or he is entitled to be indemnified.

Where the Agent causes injury to the third party in execution of his duty while carrying out his duty in good faith, the Principal is required to indemnify the Agent against consequences of the act. Further, the Principal must reimbursed the Agent of any legitimate expenses.

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4.0

AGENT'S AUTHORITY

Authority

Actual Authority 4.1

Apparent / Ostensible Authority

Actual Authority Actual authority is an authority conferred expressly upon the Agent either by written agreement. It may also be implied from the following :

oral or

1. 2. 3. .

4.2

Express authority given by the Principal Custom and trade usage Circumstances of the case Conduct of the parties

Apparent/Ostensible Authority

Apparent authority is established when a person without actual authority acts as an Agent and contracts with a third party in the Principal’s knowledge. The Principal is aware of it but does not stop him. Later, the Principal is precluded from denying the agents authority. The principle would be liable for the contract with the third party.

Apparent/ostensible authority may arise in TWO situations: 1. When the Principal by his words or conduct leads another party to believe that the Agent has authority to make contract on behalf of him. Case : Freemen & Lockleyer v. Buckhurst Park Property Ltd. Facts : Kapoor even though without authority from the company hired a firm of architects and surveyors to do some work for the company. The directors were aware of it but did nothing to stop him. They also failed to inform the third parties about Kapoor’s lack of authority. 59 Held : It was held by the court that the company was liable to pay the architect firm. Kapoor had apparent authority to act for the company.


However, there is no apparent authority where the person makes a behalf of a principal without his knowledge.

contract on

2. Where the Agent previously had authority to act but it has been terminated by the Principal without any notice to third party. Third party can claim that the Agent has apparent authority and binds the Principal to the contract

5.0

AGENT’S BREACH OF AUTHORITY 5.1

Principal is

Where Principal is named It is a situation when the Agent contracted as an Agent and the identity of the disclosed to the third party.

Where a Principal is named, a clear agency relationship exists between Agent and Principal. So, Agent incurs no right or liability under the contract. Whatever done by the Agent in the course of business will bind the Principal and he alone can sue and be sued by third party. However, there are exceptions where the Agent may be liable: 1. If the Agent agrees with third party to accept personal liability. 2. Where the Agent executes a deed and negotiable instrument in his own name. 3. 4.

Where the Agent exceeds authority and the Principal does not ratify. Where the custom of trade made the Agent liable.

In these FOUR circumstances, the third party may sue the Agent if there is any breach of contract.

5.2

Where there is a disclosed Principal

It is a situation when an Agent acts as an Agent but the identity of the Principal remains unknown. Third party knows that he is doing business with a Principal through an Agent. 60


Under Section 183 of Contract Acts 1950, Principal is not responsible to the contract. When an Agent made contract for the sale or purchase of goods for a merchant resident abroad, the merchant is making a contract with the Agent. It is because of difficulty to bring action against Principal. So the Agent may have to be personally liable. An Agent also liable when the Principal's identity is disclosed cannot be sued i.e. a minor or a person of unsound mind.

5.3

Where there is undisclosed Principal

The existence as well as identity of the Principal is not disclosed to third party at the time of the contract. The agent uses his own name in the contract and the third party is under the impression that he is contracting personally with the Agent. In the event of breach, the third party has the right to sue the Agent or the Principal or both of them. If the Principal discloses his identity before the completion of the contract, the third party may rescind the contract if he can prove that had he known the identity of the Principal or the Agent was acting for somebody else he would not have contracted. As party to a valid contract, an undisclosed principal has the right to enforce the contract against third party even though the third party does not know about the principal. This is because the contract is made for him. [Section 184 (a) of Contract Acts 1950] However, it the Agent exceeds authority of acting outside authority and the existence of the Principal is not disclosed, the principal cannot ratify the contract. He has no right and liability under the contract.

a breach

An Agent, acting for undisclosed Principal may sue on the contract if there is because he can treat it as his own name for the contract.

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Law of Agency

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