Friday, August 27, 2010

Law of Agency

The law of agency is governed by Part X of the Contracts Act 1950. An agent is defined as a person employed to do any act for another or represent another in dealings with third person[1]. The person for whom such act is done, or who is so represented, is called the “principal”

In other words, agency is the relationship which subsists between the principal and the agent, who has been authorized to act for him or represent him in dealings with others

e.g. Azzizul appoints Samdan to sign the agreement on his behalf, here Azzizul is called the principal and Samdan is his agent.

Thus in agency there are in effect two contracts:-

i. the first made between the principal and the agent from which the agent derives his authority to act for and on behalf of the principal; and
ii. the second, made between the principal and the third party through the work of the agent.

A. Who can be come an agent/principal?

Section 136 CA - Any person who is eighteen years old and above and who is of sound mind may be a principal. As between the principal and third persons, any person may be come an agent, but persons of unsound mind and who are below 18 years of age are not liable towards their principal for acts done by them as agents[2]

eg. if A employs B (a minor) to buy some goods from C on his behalf and C supplies the goods, A cannot allege that he is not liable to pay for the goods just because B is not at the age of majority. A is still liable to pay C for the goods.


Like any other contracts, a contract of agency can be expressed or implied for the circumstances and the conduct of the parties. In other words, the authority of an agent may be expressed (given by words spoken or written) or implied (inferred from things spoken or written or from the ordinary course of dealings.)

eg. X lives in Ipoh and owns a shop in Kuantan. The shop is managed by Y who normally orders goods from Z in X’s name for the purpose of the shop and Y then pays for the goods out of X’s fund with X’s knowledge.

Section 138 CA provides that no consideration is necessary to create an agency.

By express appointment by the principal
By implied appointment by the principal
by ratification by the principal
by necessity i.e. operation of law
by the doctrine of estoppel

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 an agency or sub agency agreement must be in writing.

Further more, Part X of the Contracts Act 1950, which contains the relevant provisions on agency does not contain any requirement that the appointment of an agent or sub agent has to be in writing or be evidence in writing.


Express appointment may be in written or oral form. An example of an express appointment made in writing is a Power of Attorney. Even a letter written or words spoken may be effective in appointing an agent.


The Law can infer the creation of an agency by implication when a person by his words or conduct holds out another person as having authority to act for him.[3]

e.g. If he allows another person to order goods on his behalf and habitually pays for them, an agency may be implied. In such terms he will be bound by the contracts as if he has expressly authorised them.

Chan Yin Tee v William Jacks & Co (Malaya) Ltd [1964] MLJ 290

The appellant and Yong (a minor), were registered as partners. At a meeting with a representative of the respondent company, the appellant held himself out to be Yong’s partner. Goods were supplied to Yong but were not paid for. The respondent company obtained judgement against the appellant and Yong. The appellant appeal to FC which held that since the appellant had held Yong out of his agent who had the authority to do things on his behalf, the appellant was liable for Yong’s act.

By virtue of Section 7 of the Partnership Act 1961, partners are each other’s agents when contracting in the course of the partnership business.


Agency by ratification can arise in any one of the following situations:-

i. An agent who was duly appointed has exceeded his authority or
ii. A person who has no authority to act for the principal has acted as if he has the authority.

Section 149 CA 1950 –

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 he ratifies them, the same effect will follow as if they had been performed by his authority.

When the principal accepts and confirms such a contract, the acceptance is called ratification. ratification may be expressed or implied[4]

Ratification is retrospective i.e. it dates back to the time when the original contract was made by the agent and not from the date of the principal’s ratification.

e.g. On 2 January 1996, A appointed B as his agent to buy a car not exceeding RM100,000/-. On 5 January B went to GRG Motors and ordered a car costing RM135,000/-, telling GRG Motor’s salesman that he was buying the car on A’s behalf. On 12 January, GRG Motors deliver the car to A. If A confirms and adopts the contract on 12 January, then B is said to be an agent through ratification. A can also rejects the contract since B had exceeded his authority.

Contract can be ratified under the following circumstances:-

The act must be authorised
The agent must, at the time of the contract, expressly act as an agent for the principal[5] i.e. he must not allow the third party to think that he is the principal.

Keighley Maxted & Co v Durant

An agent, R was authorised by the appellants to buy wheat at a certain price. The agent exceeded his authority and bought at a higher price in his own name but intending it for Keighley. Keighley agreed to take the wheat at that price but failed to take delivery. The court held that Keighley was liable to the Durant since R at the time of the contract did not profess to act as an agent.

SRM Meyappa Chettiar v Lim Lian Koo [1954] 20 MLJ 246

PC, the attorney of SC, entered into an agreement with the respondent under which the PC handed over to the respondent a piece of land belonging to his principal in consideration of RM 7,000/- and agreed ‘ upon the return of normal conditions, the vendor shall obtain a special power of attorney from the said SC now in India and execute the true and lawful transfer of the said land at the purchaser’s own expenses’. He further agreed that if he was unable to obtain the necessary power from his principal the RM7,000/- will be return to the respondent. At the trial, the learned judge held that the agreement had been satisfied by SC and therefore dismissed a claim for recovery of possession of the land. The Court of Appeal held that the terms of the agreement showed that PC was acting in his personal capacity and therefore the principal of ratification could not apply to the agreement

The principal only applies where the agent has professed to contract for his principal who afterwards ratifies.

The doctrine is thus stated by Tindal C.J in Wilson v Tumman [1843] 6 M&C 242 at page 242

The act done for another, by a person, not assuming to act for himself, but for such other person, tough without any precedent authority whatever, becomes the act of the principal, if subsequently ratified by him, is the known and well established rule of law. In that case the principal is bound by the act, whether it be for his detriment or his advantage, and whether it to be founded on a tort or on a contract, to the same effects as by, and with all the consequences which follow from the same act done by his previous authority.

The agent must have a principal, who is in actual existence or capable of being ascertained, when a contract is made. No one can ratify a contract if he is not a party competent to a contract at the date of the contract.

Kelner v Baxter [1866] LRE 2 CP 174

A contract to buy a hotel made by an agent on behalf of the company which is about to be formed, could not be ratified by the company since it did not exist at the time. The agent therefore held for the contract unless the third party agreed to release him.

The principal must have contractual capacity at the time when the contract is being made and at the time of ratification.
The principal must at the time of ratification, have full knowledge of all material facts, unless it can be shown that he intended to ratify the contract whatever the facts may be and assume responsibility from them[6]
The principal must ratify the whole act or contract
The ratification must not injure the third party, i.e. it must not subject the third party to damages or terminated his right or interest[7]


An agency by necessity may be created if the following three conditions are met:-

1. It is impossible for the agent to get the principal’s instruction[8]
2. The agent’s action is necessary, in the circumstances, in order to prevent loss to the principal with respect to the interest committed to his charge e.g. when an agent sells perishable goods belonging to his principal to prevent from rotting.
3. The agent of necessity must have acted in good faith.

In an emergency an agent has authority to do all such acts for the purpose of protecting his principal from loss as would be done by a person of ordinary prudence, his own case, under similar circumstances[9]


A person cannot be bound by a contract made on his behalf without his authority. However, if he by his words and conduct allows a third party to believe that the particular person is his agent even when he is not, and the third party relies on it to the detriment of the third party, he will be estopped or precluded from denying the existence of that person’s authority to act on his behalf.

C. Agency in Relation to Banking

The law of agency is relevant to bankers because the relation between a banker and a customer is based on agency. Furthermore, bank employees are agents of the bank.

D. Bank as Agent of Customers

The relationship between a banker and his customers are generally that of a debtor and a creditor or vice versa.

Foley v Hill [1848] 9 ER 1002

When a banker receives money from his customers as deposit, the banker is a debtor and his customers are creditors. On the other hand, where a banker advances money as a loan or other credit, or extends banking facilities to his customer, the bank is the creditor and the customer is the debtor.

When a customer hires a safe deposit box in which he keeps his valuables, the bank is the customers agent.

E. Bank Employees as Agent for the Bank

Within a bank, employees of the bank are agents for the bank. Thus employees who are so authorised may act on behalf of the bank. The bank, as employer, is vicariously liable for the torts committed by its employees in the course of business.

F. Duties of Principal and Agent

The rights and duties of the principal and agent depend on the express or implied terms of the contract of agency. Where there is no such contract of agency, the rights and duties of an agent to his principal and vice versa are laid down in Section 164 – 176 of the Contracts Act 1950

a) Section 164 – Agent’s duty in conducting principal’s business
b) Section 165 – Skills and diligence required from the agent
c) Section 166 - Agent’s account
d) Section 167 – Agent’s duty to communicate with the principal
e) Section 168 – Right of principal when agent deals, on his own account, in business of agency without the principal
f) Section 169 – Principal’s right to benefit gained by agent dealing on his own account in business of agency
g) Section 170 – Agent’s right to retainer out of sums received on principals account
h) Section 171 – Agent’s duty to pay sums received for the principal

Mahesan v Malaysian Government Officers Co Operative Housing Society Ltd [1978] 1 MLJ 149

The appellant who was a director and secretary of the respondent co operative society bought land at the price of RM 944,000 on behalf of the respondent. The appellant knew that the vendor had earlier paid RM 456,000 for it but did not inform the respondent accordingly. It turned out that the appellant had received RM 122,000 as a bribe or secret profit from the vendor.

held: The respondent could recover either the bribe or the amount of the actual loss suffered by it as a result of entering into the contract.

i.Section 172 – When agent’s remuneration becomes due.
j.Section 173 – Agent not entitled to remuneration for business misconduct.
k. Section 174 - Agents’ lien on principal’s property.
l. Section 175 – Agent to be indemnified against consequences of lawful acts.
m. Section 176 – Agent to be indemnified against consequences of acts done in good faith.

The duties of principal to agent is provided under section 175 – 178

Section 175 – agent to be indemnified against consequences of lawful acts
Section 176 - agent to be indemnified against consequences of acts done in good faith
Section 177 – non liability of employer of agent to do criminal act
Section 178 – compensation to agent for injury caused by principal’s negligent.


An agent’s authority may be actual or apparent. Actual authority is authorised expressly given by the principal (orally or written) or implied from the express authority given, from the circumstances of the case, custom or usage of trade, and the conduct of parties.


Section 154 – 163 of Contract Act 1950 deal with the manner which an agent may be terminated.


When both parties agree that the agency shall terminate, the agency is terminated. The principal may revoke the authority of the agent at any time before it has been exercised to bind the principal.

When the agency is for an indefinite period of time, the agent can terminate the agency by giving reasonable notice of termination to the principal - Section 159.


An agency may be revoked by operation of law in any of the following circumstances.:-

i. When the contract of agency has been performed
ii. Upon the expiry of the period fixed in the contract
iii. Death of the principal or agent
iv. When the principal or agent become insane
v. When the principal or agent become insolvent
vi. Upon the happening of a event which renders the agency unlawful.
[1] Section 135
[2] Section 137
[3] Section 140 and the illustrations.
[4] Section 150 – Ratification may be expressed or implied in the conduct of the person on whose behalf the acts are done.

[5] Section 149 CA 1950
[6] Section 151 Contract Act 1950
[7] Section 153 Contract Act 1950
[8] Section 142 Contract Act 1950
[9] Section 142 Contract Act 1950