Topic

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.

Explain the statutory requirements for creation of agency contract;

and

5.

Discuss the scope of authority of the agent.

X 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 certain 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 his behalf. 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:

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(a)

A contract between the principal and agent, where the agent attains the
authority to act for and on behalf of the principal; and

(b)

A contract between the principal and third party through an agent.

An agent can therefore enter into 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 (see Figure 8.1), as
follows:
(a)

By express appointment;

(b)

By implied appointment;

(c)

By ratification;

(d)

By necessity; and/or

(e)

By estoppel or holding out.

Ex
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LAW OF AGENCY (PART 1)

Impl
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Figure 8.1: Elements for formation of agency

8.2.1

Agency by Express Appointment

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.

8.2.2

Agency by Implied Appointment

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 As
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 agents authority.
In such a 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 find a buyer for the hotel. The agent did as instructed and
received a deposit from a prospective buyer. The owner then brought an
action to cancel the agents 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 pledging her husbands credit. The assumption is rebuttable if the
husband can prove that the wife was given sufficient 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.

8.2.3

Agency by Ratification

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

(a)

when an agent exceeded his authority; or

(b)

when a person is not an agent, but acted as if he has the authority to act as
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. Bs conduct implies a
ratification of the purchase made for him by A.

In Muthuchellapa Chettiar v. Indian Overseas Bank Ltd [1952] MLJ 25, part
payment on an overdraft by the principal (which had been arranged by the
agent without the principals 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 3 January, P appointed E as an agent to purchase
goods at the price of not exceeding RM200,000. On 5 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 Es contract with Z. If P accepted Es act on
7 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 7 June.

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

The unauthorised act must be recognised by the law and not a void
contract.

(b)

At the time the contract was made, the agent must have acted as an agent
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 was held that the principal (Keighley) was not liable and could not
ratify the contract because at the time of the contract, the agent has acted
in his own capacity.

(c)

At the time the contract was made, the agent must have actual principal in
existence.

(d)

At the time of ratification, the principal must have full knowledge 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 principal must ratify the whole contract. He cannot ratify only part
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)

Ratification must not affect, injure or terminate a third partys rights.

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)

Ratification must be exercised within a reasonable time.

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 the time the contract was made and at the time of ratification, the
principal must have contractual capacity.

8.2.4

Agency by Necessity

Agency by necessity arises when there is an emergency situation and it becomes

necessary for the agent to act to preserve the principals 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.

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(a)

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LAW OF AGENCY (PART 1)

It is impossible for the agent to get the principals instructions.

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

The contract was to carry the plaintiffs 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)

The agent acted to prevent 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)

The agent acted in good faith 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 suffering losses, if the third party does not pay
certain amount after using services provided by the principal.

8.2.5

Agency by Estoppel or Holding Out

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 agents
authority.

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For instance, E tells X in the presence of P that he is Ps agent and is authorised to

make contract on behalf of P. In actual fact, E is not Ps agent. P does not deny Es
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 Es authority.

8.3 AUTHORITY OF AN AGENT

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

Actual authority; and

(b)

Apparent authority.

8.3.1

Actual Authority

(a)

Express actual authority

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, Ss 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 Ts car. S has implied authority to allow the purchaser to test
drive the car.
In Watteau v. Fenwick [1893] 1 QB 346,
The defendant appointed a manager to run a public house. A licence was
taken out in the managers 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.

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Apparent or Ostensible Authority

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 agents
authority.
In Panorama Development (Guilford) Ltd. v. Fidelis Furnishing 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.

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.

In the case of Graphic Lines Pte Ltd v. Chai Chee Mein & Ors (1987) Nov.
Butterwoths Digest,
The Court held that the assistant manager had apparent authority because the
general manager had represented to the plaintiffs that advertisements should
be done through the assistant manager.

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SELF-CHECK 8.1
1.

Who is an agent?

2.

Can a minor become an agent ?

3.

What are the ways of formation of agency contract?

4.

Must the appointment of an agent be done expressly?

5.

Under what circumstances can the principal ratify his agents act?

6.

Does ratification of agency contract operate retrospectively?

7.

What are the conditions for an agency by necessity to exist?

8.

What is meant by agency by estoppel?

9.

What is the importance of an authority to an agent?

10.

What is the difference between actual authority and ostensible

authority?

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ACTIVITY 8.1 8.3

Discuss the following questions.
(a)

Zila was appointed by Jaya to supervise the purchase of 1000

plastic bottles produced by Syarikat Kalis Berhad (SKB). While
carrying out such duty, Zila decided to place an order of 1050
plastic bottles produced by SKB in her own name. Discuss the
effect of Zilas act according to the law of agency.

(b)

Richard has just sold his share in one company and decided 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
Richards personal use. One month after the booking date, Tan
Chong sent the car to Richard and claimed for the balance
purchase price of the car. Richard told Tan Chong that 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
Garys authority. Decide whether Tan Chong could claim for the
price of the car from Richard.

(c)

Charlie has appointed Yuppie as his agent to carry out the

following:
(i)

To deliver 200 bags of Taj Mahal rice at the price of RM4,000

to Kedai Runcit Tampan (KRT) in Bukit Tinggi on 10th
February 2004;

(ii)

To obtain the supply of 100 kilograms salted fish from

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.

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

the principal.

The formation of an agency contract can be done through an express or

implied appointment, ratification, necessity or estoppel.

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

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.

Actual authority

Holding out

Agent

Implied appointment

Apparent authority

Necessity

Estoppel

Principal

Express appointment

Ratification

Text Books:
Harlina Mohamed On & Rozanah Ab. Rahman. (2007). Undang-Undang
Perniagaan Malaysia. Selangor: Kumpulan Usahawan Muslim Sdn. Bhd.
Wu M. A. & Vohrah, B. (2000). The Commercial Law of Malaysia (2nd ed.).
Selangor: Pearson and Longman.

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Cases:
x

Graphic Lines Pte Ltd v. Chai Chee Mein & Ors (1987) Nov. Butterwoths
Digest.

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

Keighley Maxted & Co. v. Durant [1901] AC 240.

Kelner v. Baxter (1866) LR 2 CP 174.

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

Panorama Development (Guilford) Ltd. v. Fidelis Furnishing Fabrics Ltd

[1971] 3All ER 16.

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

Summers v. Solomon (1897) AC 22.

Watteau v. Fenwick [1893] 1 QB 346.