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CHAPTER 4
LAW OF AGENCY
4.1 Introduction
4.2 Nature of agency
4.3 Duties of an agent to his principal
4.4 Duties of principal to his agent
4.5 The authority of the agent
4.6 Right and liabilities of the parties

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LESSON OUTCOME
By the end of this chapter, student will be able to understand:
1.Three main form of organization
2.The nature of agency
3.Duties of an agent to his principal

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SUBTOPIC 1:
INTRODUCTION

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4.1

Introduction

The principle relating to law of agency is governed by part 10


of the contract Act 1950. That is from S.135 and onwards.
Why do we need agency relationship?
It is needed because a person may not act for himself all the
time. A person sometimes in a certain cases may not have
capacity or skills to act for himself. So that, he need help from
another person to act on his behalf.
Agency : is a relationship which subsists between the
principal and the agent who has been authorized to do act
for him or represent him in dealing with other.

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Agent: A person who derives an authority from the
principal and acts for the principal.
Principal : A person who gives authority to another person
to act on his behalf.
Section 136 : The principal must have full capacity while
making a contract.
Section 137 : An agent can be a minor. However it is not
advisable for a principal to appoint a minor to be his agent
because the principal will not be able to recover any loss
from minor even though it is caused by him.
Notes : Any body can be an agent.
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E.g. if Mamat employ Leman who is sixteen years old to buy
some goods from Samy on his behalf and Samy supplies the
goods, Mamat cannot allege that he is not liable to pay for the
goods just because Leman is a minor. Mamat is still liable to
pay for the goods.

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SUBTOPIC 2:
NATURE OF AGENCY

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4.2

Nature of agency

In the agency relationship, there are in fact two contracts exist:


a) Contract between the principal and the agent which the agent
derives his authority to act for or on behalf of the principal.
b) Contract between the principal and the third party through the
work of the agent.
Creation of agency
i. Agency by principals appointment
ii. Agency by ratification
iii.Agency by necessity
iv. Agency by estoppel

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1. AGENCY BY PRINCIPALS APPOINTMENT


It is by express appointment when the principal is expressing a
person to be his agent. However, for contracts that are under
seal, his own appointment must be made under seal too.
It is implied appointment by the principal, thas is, the law will
infer the creation of an agency relationship under three
circumstances;
a) By holding- out
b) Partnership relation
c) Between a husband and wife

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A) BY HOLDING - OUT
That is when a person by his words or conducts hold out
another person as having authority to act for him.
E.g. the principal allow an agent to order goods on his behalf
and the principal habitually pays for them. Here, an agency
relationship may be implied between the principal and the
agent by the conduct of the principal.

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B) PARTNERSHIP RELATIONSHIP
Agency relationship is also implies between a partner and
another partner in a partnership relationship.
It is provided by S.7 of the partnership Act 1662 which states
that partners are each other agents when contracting in the
course of the partnership business.

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C) BETWEEN A HUSBAND AND WIFE


Agency relationship may be existed or implied by the law
between husband and wife. There is a presumption that the
wife has authority to buy goods on her husbands credit so that
the contract will bind the husband. Here, the wife is
considered as an agent. Thus, the third party can claim the
price from the husband.
However, the presumption can be rebutted by the husband by
proving one of the following :
It the husband expressly has forbidden his
wife on credit but the wife still keeps on doing
so, then, the husband is not liable.
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ii.

If the husband expressly warns the tradesman not to


supply his wife with goods on his credit.
iii. His wife has already sufficiently been provided with the
goods of the same kind in question.
iv. His wife was given sufficient allowance for buying goods
without having to buy on his husbands credit.
v. the goods ordered though necessary were unreasonable
taking into consideration of her husbands income at that
time.

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2. AGENCY BY RATIFICATION
It can be define as an agent relationship which subsists when
the principal accepts or ratifles the contract made either by an
agent who has exceeded his authority or by a person who has
no authority but has acted as if he has the authority
In each case, the principal can either reject the contract or
accept the contract so made. Only when the principal accepts
the contract, agency by ratification may arise.

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E.g. On the 1st January , X appointed Y as his agent to buy a
car not more than RM20000. on the 2nd January, Y went to Zs
shop and ordered a car which cost RM21000, telling Z that it
is for his principals used. So, in this case, the agent has
exceeded his authority. On the 3rd January, Z delivered the car
to X and X ratified the contract made by Y who has exceeded
the authority. Y, here was said to be an agent by ratification.
Therefore, the contract made by Y and Z on the 2nd January
was binding on X and not on 3rd January which is at the time
the ratification is made.

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To make an agency by ratification arises, nine conditions need to be
fulfilled before the principal ratifles:
The act or contract must be unauthorized.
it must be either the agent has exceeded his authority or person
who is not the agent has acted as if has the authority.
The agent must expressly act as the principals agent at the time
when the conract is made with the third party.
He must not allow the third party to think that he is the
principal. In other words, the agent must inform the third party
that he is acting on behalf of his principal.

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Keighley Maxted & co. V Durant
Facts: An agent named Robert was authorized by the principal
to buy wheat at a certain price. The agent exceeded his
authority and bought them at a higher price under his own
name but intending them for his principal named Keighley. At
first, Keighley agree to take the wheat at that price but later on
falled to take delivery.
Held: Keighley was not liable to Durrant because he could not
be held to have ratified Roberts contract because Robert at the
time of the contract had not informed Durrant of him being the
agent.
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3. The agent must have the principal who is in actual existence
and capable of being ascertained.
If the principal does not exist at the time of the contract,
ratification will not considered as exist.
Kelner v Baxter
A contract to buy a hotel was made by an agent on behalf of
the company which was about to be formed.
The court held that company could not ratify the contract
since it did not exist at the time when the contract was made.

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4. The principal must have contractual capacity at the time of
the contract being ratified.
Grover v Grover
A contract for fire insurance was made by A on behalf of B
without authority from B. A acted as if he had the authority.
The contract was sort to be ratified by the principal after he
know that the factory in respect of which the insurance was
sort had burnt down.
It was held that the principal has no contractual capacity to
insure the factory which had been destroyed.

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5. The principal at the time of ratification must have full
knowledge of all material facts.
The principal must have full knowledge about who is the third
party, terms of contract, ect. Unless it can be shown that the
principal intend to ratify the contract whatever the facts may be.
Fitzmaurice v Bayley
An agent purported to purchase a land on behalf of the principal
who later wrote that he did not know to whom he made the
contract with. However. The principal was willing to ratify the
contract according to any to any terms the agent was made.

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6. The principal must ratify the whole of the contract and cannot
accept only part of the contract.
7. The ratification must not injure the third party.
if tit does injure the third party, then the ratification is void.
8. The unauthorized act must be one which is recognized by law.
Brook v Brook
An agent forged his principals signature to a cheque. But
before the cheque fell due, the holder who discovered the
forgery threatened to prosecute the agent. The principal agree to
ratify the agents act but later on had refuse to pay for the
cheque. The court held that the ratification is not valid so that
the action sort to be ratified was illegal.
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9. The ratification must be made within the reasonable time.
Metropolitan Asylum Board v Kingham & Sons
The principals purported ratification one week after the
agents contract enter into without authority to buy eggs was
held to be late and reasonable.

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AGENT BY NECESSITY
S142 An agent has authority in an emergency to do all such
acts for the purpose of protecting his principal from any loss
as would be done by a person ordinary prudence in his own
case under similar situation.
Conditions to be fulfilled:
1. It must be impossible for the agent to get the principals
instruction.
Springer v Great Western Railway
The defendant, a railway company which was suppose to carry
the goods to its destination, sold the goods (tomatoes) in the
middle of the way without trying to communicate with the
owner to get further instruction when it was possible to do so.
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Held: There was no agency by necessity arose. The owner
could claims damages from the defendant as he was not the
agent by necessity.
2. The agents action is necessary to prevent loss to the principal.
Agency by necessity does not arise if there is no real urgency.
For example, where the goods are sold merely because they
were inconvenience to the carrier.
Great Northern Railway co V Swaffield

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3. The agent must act in good faith for the benefit of his
principal.
- An agent must make sure that his action must be reasonable
in the circumstances. Good faith means good intention not
because of personal interest.

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AGENCY BY ESTOPPEL
It arises when a person who is without authority , when he is
not formally appointed acts as an agent. The principal is aware
of it but he does not deny the authority of that person of being
his agent.
In other words, the principal, by his word or conducts allows
the third party to believe that the person is his agent.
Therefore, he will be estoppels or precluded from denying the
authority of that person of being his agent.

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Freeman & Lockyer v Buckhurst Park Properties Ltd.
Facts: Kapoor without authority hired affirm of architects and
surveyors to do work for the company. The other directors
even though had knowledge about this did not inform the third
party that Kapoor had no authority. The third party sued the
company for the payment.
Held: The company was precluded from denying Kapoors
authority to act for them. Agency by the estoppel existed
between Kapoor and the company. Therefore, the company
was to pay the third party.

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SUBTOPIC 3:
DUTIES OF AN AGENT TO HIS PRINCIPAL

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4.3

Duties of an agent to his principal

Normally, duty of an agent will depend on the term of the


contract of agency. If the contract made by the contracting
parties is silence about the duties of the agent, those duties will
be provided by Section 164-178.
1. OBEY (S. 164)
It is very important that an agent must obey the principals
instruction. If the agent fails to do so, it means that the agent
has breached the contract. Under that circumstances, the agent
will be liable for any loss sustained by the principal.

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Turpin v Bilton
Facts: An agent failed to ensure the ship when his principal
instructed to do so. The ship was loss and the principal
claimed damage from the agent.
Held: Failure to obey the principals instruction may be treated
as a breach of contract and the agent was liable for the loss.

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2. CUSTOMS
If no instruction is given by the principal, the agent must act
according to the customs ( what is usually done) at the place
where he carries on his business or work. If he falls to do so,
the agent has to make good any loss sustained by the
principle.
3. CARE (S. 165)
An agent must exercise care and diligence while carrying out
his work and to use such skills as he possesses.
Keppel v Veller

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4. ACCOUNT
The agent must give proper accounts when required by
the principal. The account must include all monies,
properties and goods handled by the agent.
Parker v Manson
5. PAY (S.171)
An agent must pay to his principle all money or properties
received on hold behalf.
EXCEPTION S 170& S 174.

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6. COMMUNICATE (S 167)
An agent must use all reasonable diligence to communicate and to
get the principals instruction.
EXCEPTION : SECTION 142
Springer v Great Western Railway

7. INTEREST(S 168)
AN agent must not let his own interest conflicts with his duty. Thus,
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.

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8.

SECRECT PROFIT
An agent must not make any secret profit out of his duty.
What is meant by secret profit?
Secret profit means a bribe or any financial other remuneration
agreed by the principal and agent.
If the agent made a secret profit, the principal is entitled to the
following remedies:

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a) If the principal knows and consents, agent is entitled to keep
the profit as it is no longer a secret.
b) If the principal does not agree, he can:
i. S 168 repudiate the contract made by the agent with the
third party or
ii. S 169 recover the secret profit from the agent.
Tan Kiong Hwa v Andrew S.H Chong
iii. The principal may refuse to pay commission or salary to
the agent. If the commission has been paid, the principal
can claim it back.
Andrew v Ramasay & Co
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iv. The principle may dismiss the agent for breach of duty
Boston Deep Sea Fishing & Ice Co. v Ansell
v. The principal may sue the agent or third party for any loss or
damages.
Mahesans Case
vi. The principal may initiate criminal action against the agent
and/or the third party under the Anti Corruption Act 1997.
9. DISCLOSED
Not to disclosed any confidential information or documents
entrusted to him by his principal.

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10. DELEGATE
Agent cannot employ another person to do his duty. This is
also known the maxim delegatus non protest delagare or a
delegate cannot he appoints on account of his qualifications
or expertise and it would unfair if the agent delegate such
authority to another party.

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EXCEPTIONS:
An agent may delegate his authority to another or to employ a
sub-agent in the following circumstances:
1. APPROVES
Where the principal approves of the delegation of authority.
CASE: DE BUSSHE V ALT
2. PRESUMES
Where it is presumed from the conduct of the parties that the
agent would have power to delegate his authority.
3. CUSTOMS
Where the customs of the trade or business permits delegation.
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4. NATURE
Where the nature of the agency is such that delegation of the
authority to another person is necessary to complete the
business.
5. EMERGENCY
In case of necessity or unforeseen emergency, for example,
illness of the agent.
6. MINISTERIAL
Where the act to be done is purely ministerial or clerical and
does not involve the exercise of discretion.
Allam & Co v Europa Poster Services Ltd.
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SUB-AGENT:
S.144 Where delegation of duties is authorized by the
principal, the person who is appointed by the agent to act in
the business of the agency and is the control of the agent is
called a sub- agent.
Exception where a sub-agent commits a fraud or willful
wrong, the principal can sue either the agent or sub-agent or
both for the fraud or willful wrong
Hedley Byrne v Heller & Partner Ltd.

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SUSTITUTED AGENT:
S.147 An agent is allowed to name another person to act for
the principal in the business of the agency. Thus the person so
named is deemed to be the agent of the principal and not his
sub-agent. The original agent is not longer an agent to the
principal

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SUBTOPIC 4:
DUTIES OF PRINCIPAL TO HIS AGENT

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4.4

Duties of principal to his agent

Provided in section 175 178


1. S 172 TO PAY THE AGENT THE COMMISION OR
OTHER REMUNERATION.
The agent has a right to receive commission or other
remuneration.
Tan Chiok Sing v Lian Fat Sawmill Co.
Also refer Section 173.

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2. NOT TO WILFULLY PREVENT THE AGENT FROM
EARNING HIS COMMISION.
Where an agent has been earlier appointed, a principal is not
allowed to employ a second agent. If the principal does so, he
could only deprive the original agent of his commission
particularly if the original agent is responsible for binging
together the principal and third party
Luxor v Cooper

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3. S. 175 TO INDEMNIFY AND REIMBURSE THE AGENT
FOR ACT DONE IN THE EXERCISE OF HIS DUTY
An agent is entitle to be done be indemnified by the principal
against all losses and liabilities incurred by him the
performance of his duty and to be reimbursed in respect of
legitimate expenses or according to the principals instruction.
The right to an indemnity
i. Where the agent has incurred losses or liability in the
performance of agency.
Kyall and Evatt v Lim Kim Keat

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2. If the agent cause the injury to the third party in the
performance of his duty while carrying out his duty in good
faith, he will be indemnified by the principal.
Yoe Tin Seng v Lim Choo Kee
3. S.178 Where an agent suffers injury due to the principals
neglect or lack of skill, the principal is legally bound to make
compensation to his agent in respect of that injury.

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SUBTOPIC 5:
The authority of the agent

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4.5

The authority of the agent

General principal : The principal is bound by the agents act if


is done within his authority.
There are two types of an agent authority :
1. ACTUAL AUTHORITY OR REAL AUTHORITY
It comprises:
Authority expressly given by the principal to the agent
orally or in writing (s 140 & s 141)

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Authority implied from the following circumstances:
The agent according to the express authority given
by the principal
The circumstances of the case
The custom or usage of trade
The situation and conduct of the parties.
Watteau v Fenwick

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2. APPERENT AUTHORITY OR OSTENSIBLE
AUTHORITY
It comprises:
Where principal by his word or conduct leads a third
party to believe that his agent has authority to make
contract for him ( s 190)
Chew Hock San & Ors v Connaught Housing
Development Sdn Bhd
Where the agent previously had authority to act but that
authority has been terminated by the principal without
any notice to third party.
Graphic Lines Pte Ltd v Chai Chee Mein & Ors
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SUBTOPIC 6:
RIGHT AND LIABILITIES OF THE PARTIES

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5.6

Right and liabilities of the parties

Right and liabilities according to the category of the principal.


1. A named principal
A name principal is one whose name has been disclosed to
the third party by the agent.
The third party knows that the agent is acting for an
identified principal.

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Right and liabilities
Where an agent contracts as agent for a named principle, the
relation of an agency lawfully exists.
Thus under s 183, the agent incurs no right or liability under
the contract. He drop out as soon as the contract is made
between the principal and the third party.
The principal alone who can sue and be sued by the third party
provided that the agent has acted within his authority in
making the contract.(s 179)

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EXCEPTION:
An agent may be personally liable in the following circumstances:
1. Where the agent agrees to accept personal liability or contracts in
such a way as to make himself personally liable
(s 183) Ching Yuen Tung v Bepaketik
2. Where an agent execute a deed in his own name.
3. Where an agent signs a negotiable instruments in his own name
without making it clear that he signing only a agent
4. Where an agent exceeds his authority and the contract has not been
ratified by the principal . The agent is liable for breach of warranty
of authority
5. Where the custom of trade makes the agent liable.

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QUIZ
1. Which one is main form of business organization
A. Sole proprietorship
B. Partner
C. Employee
2. Creation of agency by principals appointment (True/False)

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3. In the agency relationship there are in fact one contracts exist
(True/False)
4. Agency is a relationship which subsists between the principal
and the agent who has been authorized to do act for him or
represent him in dealing with other (True/False)

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CONTINUE
5. A person sometimes in a certain cases may not have capacity
or skills to act for himself. So that, he need help from another
person to act on his behalf (True/False)
6. Agency relationship is also implies between a partner and
another partner in a partnership relationship (True/False)

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CONTINUE
7. Agent is a person who gives authority to another person to act
on his behalf (True/False)
8. Principal is a person who derives an authority from the
principal and acts for the principal (True/False)

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9. We need agency relationship because a person may act for
himself all the time (True/False)
10. The principle relating to law of agency is governed by part 10
of the contract Act 1950 (True/False)

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Thank you!

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