Topic 8 Law of Agency (Part 1)

 

 

Topic  

8 

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Law of  Agency (Part 1)

LEARNING OUTCOMES By the end of this topic, you should be able to: 1. Define the meaning of agency; 2. Explain the purpose of agency contract; 3. Describe the types of agency contract; 4. Identify the statutory requirement for creation of agency contract; and 5. Discuss the scope of authority of the agent.

 INTRODUCTION The relationship between a principal and an agent is very important because at times, a person needs help and assistance from another person to act on his  behalf or become his proxy to perform cert certain ain acts. For example, where a person intends to sell his land, he may need the service of a real estate agent to sell the land on behalf of him. The owner will then authorise the real estate agent to deal with the land. This is where the agency relationship comes into existence. In Malaysia, the law of agency is governed by Part X of the Contracts Act 1950. Section 135 of the Act defines an „agent‰ as „a person employed to do any act for another or to represent another in dealings with third persons‰, and a „principal‰ as „the person for whom such act is done, or who is so represented.‰ From the definition above, it can be said that the contract of agency is divided into two: (a)

A con contra tract ct be betwe tween en the pri princi ncipal pal aand nd age agent, nt, w where here the aagen gentt att attain ainss the authority to act for and on behalf of the principal; and

 

 

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A co contra ntract ct be betwe tween en th thee pri princi ncipal pal aand nd th third ird p party arty thro through ugh aan n age agent. nt.

An agent can therefore make contracts with third parties that are binding on the principal.

8.1

CAPACITY 

Section 137 of the Contracts Act 1950 provides a requirement for a person to  become an agent. According to the provision, „any person may become an agent, but no person who is not of the age of majority and of sound mind can become an agent, so as to be responsible to his principal.‰ For example, A hires B, who is 16 years old, to buy goods from C on his behalf. C supplies the goods to A through B, but B sells the goods for his benefit. A cannot deny his responsibility to C on the ground that B is a minor. A is still liable to C for the payment of the goods and A cannot claim damages from B.

8.2

FORMATION OF AGENCY 

There are several ways for a contract of agency to exist (Refer to Figure 8.1), as follows: (a)

By expr expres esss ap appo poin intm tmen entt

(b) (b)

By im impl pliied ap appo poin intm tmen entt

(c)

By ratification

(d)

By n neecessity

(e) (e)

By esto estopp ppel el or Âhol Âholdi ding ng ou outÊ tÊ

 

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E  x    p r   e s   s    A    p  p  o i   n m  e n  t  

       t    n    e           tm             in    o       p           A  p      d    e          l i       p              Im

  n    i  o   t   a    i  c    i  f   t   a    R

FORMATION  OF AGENCY

  ”  u t  O   O  n g   i d n   l  d  o   ”    H  /   /   l  e  o  o p  t  s   E

N    e  c   e  s   s  i    t    y   

Figure 8.1: Elements for formation of agency

8.2. 8. 2.1 1

 

Ag Agen ency cy by Ex Expr pres esss A App ppoi oint ntme ment nt

An agency by express appointment is created through verbal or written authorisation by the principal to the agent. The principal gives express authority to the agent as stated in the first part of Section 140 of the Contracts Act, 1950. According to Section 140, “an authority is said to be express when it is given by words spoken or written.” 

8.2. 8. 2.2 2

Ag Agen ency cy by Im Impl plie ied d App Appo oin intm tmen entt

The second part of Section 140 of the Contracts Act 1950 provides for implied appointment of an agent. The appointment is implied when the authority can only be drawn from the circumstances of the case, which means things that were spoken or written, or act done by the parties in the ordinary course of dealing.

 

 

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For example, A stays in Shah Alam and has a shop in Kuala Lumpur. Most of the time, B, who manages the shop, orders and pays for goods from Y, using AÊs name. Here it is clear that B has an implied authority from A, as an agent to deal with Y in purchasing goods for the shop. There are, however, situations where the authority given under the express appointment by the principal does not specify the extent of the agentÊs authority. In such case, an agent who has been authorised to do certain acts, will have the authority to do other acts, which are connected to the authorised act. This principle is laid down in Section 141(1) of the Act that says, „an agent having an authority to do an act has authority to do every lawful thing which is necessary in order to do the act.‰ Also provided in Section 141(2) of the Act, „an agent having an authority to carry on a business has authority to do every lawful thing necessary for the purpose, or usually done in the course of conducting such business.‰ For instance, M appointed (either verbally or written) N, who lives in Kota Bharu, as an agent to market his product in Kota Bharu. In his appointment, it did not specify the extent of authority in which N can act. Therefore, as a marketing agent, N has the authority to deal with the advertisement, packaging, distribution and transportation of the product as well as other matters that are connected with his appointment. In Summers v. Solomon (1897) AC 22, a real estate agent was instructed by a hotel owner to findfrom a buyer for the hotel. The The agent did as instructed received a deposit a prospective buyer. owner then broughtand an action to cancel the agentÊs act. The Court held that : Even though the agent was not expressly authorised to receive deposits from prospective buyer, he was presumed to have acted under the ambit of implied authority of an agent.

Implied appointment of agency also exists between partners in a partnership  business. Under common law, an agency relationship exists between husband and wife. It is presumed that a wife has the authority to buy necessaries for their living by can pledging credit. The sufficient assumption is rebuttable if the husband prove her thathusbandÊs the wife was given allowance for buying goods, or the wife was sufficiently provided for with the goods, or the order was

 

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unreasonable, or he expressly forbade his wife to pledge his credit or he expressly warned the trader not to supply his wife with the goods.

8.2 .2.3 .3

Age gen ncy by R Rat atiifi fica cattion ion

Agency by ratification can arise if one of the situations below exists: (a) (a)

wh when en an ag agent ent exce exceed eded ed his his aaut uthor horit ity; y; or

(b)

whe when n a pe person rson is n not ot an age agent, nt, b but ut ac acted ted aass if h hee has the aautho uthorit rity y to aact ct aass an agent.

In the event of the above, Section 149 of the Contracts Act 1950 provides that, „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 the principal accepts the contract, such acceptance is known as ratification. Ratification renders the principal liable to the contract, as if the agent has been authorised to do such act. Ratification can be done expressly or impliedly as provided in Section 150 of the Contracts Act 1950. For example, A, without authority, buys goods for B. Afterwards B sells them to C on his own account. BÊs conduct implies a ratification of the purchase made for him by A.

[1952] 52] MLJ 25, par partt In Mut huc hellapa C hettiar v. Indian O verseas Bank Ltd  [19 payment on an overdraft by the principal (which had been arranged by the agent without the principalÊs authority) was an implied ratification of the loan. Ratification operates retrospectively. Thus, the ratified contract is considered valid or effective from the date it was made by the agent and not from the date of ratification. For example, on 3rd January, P appointed E as an agent to purchase goods at the price of not exceeding RM200,000. On 5th June, E agreed to purchase goods from Z at the price of RM220,000. In this case, E was not authorised to purchase the goods exceeding the amount given by the principal. Therefore, P had the option to either ratify or reject EÊs contract with Z. If P accepted EÊs act on 7th  June, E would therefore become an agent by ratification. Consequently, the contract entered by E and Z was valid on 5th June and not on 7th June.

 

 

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However, such ratification by the principal can only be done under the following conditions:(a)

The una unautho uthoris rised ed aact ct m must ust be rreco ecogni gnised sed by tthe he llaw aw aand nd n not ot a voi void d contract.

(b)

At tthe he ti time me th thee con contra tract ct wa wass mad made, e, th thee age agent nt mu must st ha have ve aacted cted as aan n age agent nt for the principal. Therefore the agent must disclose that the contract was entered into on behalf of his principal. In the case of Keighley Maxted & Co. v. Durant [1901] AC 240, the appellants authorised the agent to buy wheat at a certain price. The agent exceeded his authority and bought at a higher price, in his own name. The principal, however, agreed to take the wheat at the higher price but failed to take delivery. It wasthe held that: The principal not liable and could not ratify contract because at the(Keighley) time of thewas contract, the agent has acted in his own capacity.

(c)

At tthe he ti time me th thee con contrac tractt was mad made, e, th thee age agent nt mu must st ha have ve ac actual tual prin princip cipal al in existence.

(d)

At th thee tim timee of rat ratifi ificat cation, ion, tthe he pri princi ncipal pal mu must st ha have ve fu full ll knowl knowledg edgee of the material facts to be ratified, unless there is evidence to show that he does not care of the facts that he intends to ratify. According to Section 151 of the Contracts Act 1950, „no valid ratification can be made by a person whose knowledge of the facts of the case is materially defective.‰ In Kelner v. Baxter (1866) LR 2 CP 174 , a contract to buy a hotel on  behalf of a company by an agent could not be ratified by the company  because it did not exist at that time.

(e)

The p prin rincip cipal al mu must st ra ratif tify y the w whol holee con contra tract. ct. H Hee can cannot not rrati atify fy on only ly p part art which is advantageous to him and reject the rest. Section 152 of the Contracts Act 1950 provides „a person ratifying any unauthorised act done on his behalf ratifies the whole of the transaction of which the act formed a part.‰

 

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(f)

Rat Ratifi ificat cation ion m must ust not aaffe ffect, ct, inj injure ure o orr te termin rminate ate a th third ird par partyÊ tyÊss ri rights ghts.. Section 153 of the Contracts Act 1950 provides that „an act done by one person on behalf of another......which.....would have the effect of subjecting a third person to damages, or of terminating any right or interest of a third person, cannot, by ratification, be made to have that effect.‰

(g)

Rat Ratifi ificat cation ion mus mustt be exer exercis cised ed w with ithin in a rea reason sonabl ablee ti time. me. In Grover & Grover v. Mathews [1910] 2 KB 401 , a fire insurance policy ratified after the event insured against had happened was held to be ineffective.

(h)

At th thee tim timee the ccontr ontract act w was as ma made de an and d at th thee tim timee of ra ratif tifica icatio tion, n, the principal must have contractual capacity.

8.2.4

Agency b by yN Ne ecessity

Agency by necessity arises when there is an emergency situation and it becomes necessary for the agent to act to preserve the principalÊs property. Section 142 of the Contracts Act 1950 provides that, „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.‰ For an agency by necessity to exist, the following conditions must be fulfilled.

 

 

(a)

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It iiss iim mposs ssiible ffo or the agent to get the principalÊs instructions. In Spri nger v. Great Western Railway Compa ny  ny [1921] [1921] 1 KB 257, The contract was to carry the plaintiffÊs tomatoes from Jersey to Covent Garden market. However, the ship arrived late at Weymouth due to bad weather and some of the tomatoes were found to be bad. Without communicating with the plaintiff, the defendants decided to sell the tomatoes locally because it was not possible for them to arrive in Covent Garden market to deliver the tomatoes in a saleable condition. The plaintiff then claimed for damages in conversion based on the market price of tomatoes in Covent Garden. The Court held that : The plaintiff was entitled to damages because the defendants were not agents of necessity. They have failed to communicate with the plaintiff.

(b) (b)

Th Thee aage gent nt acte acted d tto op pre reve vent nt the principal from incurring loss or damages. If the goods are not perishable goods like clothes or furniture, it will not give rise to emergency situation that requires disposal of them. Therefore, an agent who acted in such case will be liable for the loss suffered by the principal.

(c)) (c

Th Thee aage gent nt acte acted d iin ng goo ood d ffai aitth for the interest of the principal. The agent may be considered has acted in good faith to protect the interest of the principal if he collects the payment from the third party in order to prevent his principal from services suffering losses, ifbythe party does not pay certain amount after using provided thethird principal.

8.2. 8. 2.5 5

Ag Agen ency cy by E Est stop oppe pell o orr Hold Holdin ing gO Out ut

Under Section 190 of the Contracts Act 1950, „when an agent has, without authority, done acts or incurred obligations to third 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 third persons to  believe that those acts and obligations were within the scope of the agentÊs authority.‰

 

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For instance, E tells X in the presence of P that he is PÊs agent and is authorised to make contract on behalf of P. In actual fact, E is not PÊs agent. P does not deny EÊs statement. When X sold goods to E, X may claim for the payment of the goods from P, and P was estopped from denying the existence of EÊs authority.

8.3 AUTHORITY OF AN AGENT  It is important to know the extent of an agentÊs authority because any act done by the agent within his authority will bind the principal. The agentÊs authority is classified into: (a)

Actua uall aut autho horrity aand nd

(b)

Ap Appa pare rent nt auth author orit ity. y.

8.3.1

Actual Authority

(a)

Express aacctual aau uthority Express actual authority is expressly given by the principal (orally or in writing) to the agent. For example, T appoints S as his agent to purchase goods not exceeding RM10,000. In such case, SÊs actual authority is to purchase goods on behalf of T, not exceeding RM10,000.

(b)

Implied actual or usual authority Implied actual authority is the proper or necessary authority given to the agent to execute the express authority. For example, T appoints S as his agent to sell TÊs car. S has implied authority to allow the purchaser to test drive the car.

 

 

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In Watt eau v. Fenwick [1893] Fenwick [1893] 1 QB 346,   The defendant appointed a manager to run a public house. A licence was taken out in the managerÊs name. The defendant forbade the manager to buy cigars on credit, which was disregarded by the manager. The plaintiff then claimed for the price of the cigars from the defendant. The Court held that : The defendant (as the principal) was liable to pay  because a manager of a public house usually had the authority to make such purchases. Therefore, the plaintiff could rely on the usual authority of the manager if he has no knowledge of the restrictions imposed by the principal.

In Pa nora ma Development (Guilford) Ltd. v. Fidelis Fur nishi ng Fabrics   Ltd   [1971] 3 AllER 16, The Court held that: The company (defendant) was liable for the contract of hiring of motor vehicles made by the company secretary. Although the company secretary exceeded his actual authority in hiring the motor vehicles from the plaintiffs, the act was within the usual authority of a company secretary, and it was considered as part of the company administration.

8.3. 8. 3.2 2

Ap Appa pare rent nt or Os Oste tens nsib ible le Auth Author orit ity y

Apparent authority arises where a principal (by words or conduct) makes the third party believe that the agent has the authority to make contracts for the principal. According to Section 190 of the Contracts Act 1950 „when an agent has, without authority, done acts or incurred obligations to third 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 third persons to  believe that those acts and obligations were within the scope of the agentÊs authority.‰ The principal is therefore precluded from denying the authority of the agent  because the element of estoppel applies. It is due to the representation made by the principal to the third party that leads the third party to believe that the agent has such authority.

 

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In the case of Graphic Lines Pte Ltd v. C hai C hee Mein & Or s  (1987) Nov. ButterwothsÊ Digest, The Court held that : The assistant manager had an apparent authority because the general manager had represented to the plaintiffs that advertisements should be done through the assistant manager.

SELF-CHECK 8.1 (a) (b) (b) (c) (c)

Who is an agent? Ca Can nam min inor or be beccom omee aan n aage gent nt ? Wh What at aare re tthe he w way ayss of fform ormat atio ion n of aagen gency cy ccon ontr trac act? t?

(d) (e) (f) (g) (h) (h) (i) (i) (j) (j)

Mus Mustt tthe he appo appoint intment ment of an age agent nt b bee d done one expr express essly? ly? Under Under w what hat ccirc ircums umstanc tancee ca can n the pri princi ncipal pal rati ratify fy hi hiss agentÊ agentÊss ac act? t? Doe Doess rrati atific ficati ation on of age agency ncy con contra tract ct oper operate ate ret retros rospec pectiv tively ely?? Wha Whatt ar aree th thee co condi nditio tions ns for for aan n ag agenc ency y by nec necess essity ity to eexis xist? t? What What is me mean antt b by y aage genc ncy yb by y eest stop oppel pel?? Wh What at is the im impo port rtanc ancee of an aaut uthor horit ity y tto o aan n ag agen ent? t? Wh What at iiss th thee di diff ffer eren ence ce b bet etwe ween en u usu sual al aaut uthor horit ity y an and d os oste tensi nsibl blee authority?

 

 

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ACTIVITY 8.1 – 8.3 Discuss the following questions. (a) Zila wa wass appoin appointed ted by Ja Jaya ya to supe supervise rvise tthe he purcha purchase se of 1000 plastic produced by Syarikat Berhad (SKB).ofWhile carryingbottles out such duty, Zila decidedKalis to place an order 1050 plastic bottles produced by SKB in her own name. Discuss the effect of ZilaÊs act according to the law of agency. (b) Richard has jjust ust sold hi hiss share in one ccompany ompany and and decide decided d to  buy a new car for his wife. On 15 June 2007, Richard appointed Gary as his agent to buy a car at the price not exceeding RM70,000. The next day, Gary went to see Tan Chong, a car dealer and booked a car at the price of RM75,000 and paid the deposit of RM7,500. Gary told Tan Chong that the car was meant for RichardÊs personal use. One month after the booking date, Tan Chong sentofthe to Richard Richard told and claimed for the purchase price thecar car. Tan Chong thatbalance he has never authorised Gary to purchase the car at that price and refused to accept the car. Tan Chong knew about the limitation of GaryÊs authority. Decide whether Tan Chong could claim for the price of the car from Richard. (c) Charli Charliee has app appointed ointed Y Yuppie uppie as his agen agentt to car carry ry out the following: i. To de deli live verr 2200 00 ba bags gs of Taj Ma Mahal hal ri rice ce at th thee p pri rice ce of RM4,000 to Kedai Runcit Tampan (KRT) in Bukit Tinggi on 10th February 2004; ii ii..

To ob obta tain in the supp supply ly of 100 100 k kil ilog ogram ramss ssal alte ted d ffis ish h ffrom rom Tamban Enterprise (TE) after delivery of the rice bags to KRT.

On the 10th of February, upon reaching KRT, Yuppie discovered that the shop was closed beginning 9th  February and would be opened on 15th  February 2004. Without contacting Charlie for further instruction, Yuppie went to Pasar Mini Sayugia (PMS), which agreed to buy all the rice bags at the price of RM3,000. Later, Yuppie went to TE and bought 150 kilograms of salted fish on behalf of Charlie. Advise Charlie on the legal claims that he can take against Yuppie.

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Agency arises from an agreement between the principal and the agent.

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In the agreement the principal authorises the agent to do things on behalf of

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the principal. The formation of an agency contract can be done through an express or implied appointment, ratification, necessity or estoppel.

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Agency by express appointment can be done verbally or in writing.

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Agency by ratification arises when the principal accepts the contract made by the agent who exceeds his authority or acts without authority. A ratified contract is valid and effective from the date the contract was made. Agency by necessity arises when there is an emergency situation which would require the agent to act promptly. Implied actual authority is the proper or necessary authority given to the agent to execute the express authority. Apparent authority arises where a principal makes the third party believes that the agent has the authority to make contracts for the principal.

Principal

Implied appointment

Agent

Ratification

Actual authority Apparent authority

Necessity Estoppel

Express appointment

Holding out

Text Books: Harlina Mohamed On & Rozanah Ab. Rahman. (2007). Undang-Undang Perniagaan Malaysia. Selangor: Malaysia. Selangor: Kumpulan Usahawan Muslim Sdn. Bhd. 

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Wu M. A. & Vohrah, B. (2000). The Commercial Law of Malaysia (2nd ed.) . Selangor: Pearson and Longman.

 

 

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Cases: Graphic Lines Pte Ltd v. Chai Chee Mein & Ors (1987) Nov. ButterwothsÊ Digest. 

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Grover & Grover v. Mathews [1910] 2 KB 401.

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Keighley Maxted & Co. v. Durant Duran t [1901] AC 240. Kelner v. Baxter (1866) LR 2 CP 174.

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Muthuchellapa Chettiar v. Indian Overseas Bank Ltd [195] MLJ 25.

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Panorama Development (Guilford) Ltd. v. Fidelis Furnishing Fabrics Ltd [1971] 3All ER 16.

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Springer v. Great Western Railway Company [1921] 1 KB 257.

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Summers v. Solomon (1897) AC 22.

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Watteau v. Fenwick [1893] 1 QB 346.