Law of Agency: Contract Act 1950

Law of Agency

• A contract of agency involves a tripartite relationship.
• The agent is given authority to bring the principal into contractual relations with third parties.
• Consideration is not necessary for the creation of an agency (KGN Jaya Sdn Bhd v Pan Reliance Sdn Bhd (1996)).
• Section 135 of the Contracts Act 1950 defines an agent as a person employed to do any act for another or to represent another in dealings with third persons.
• The person for whom such an act is done is called the principal.
• Section 136 of the Contracts Act 1950 states any person who is eighteen years old and above and who is of sound mind may be a principal.
• Any person may become an agent, but persons of unsound mind and those below 18 years are not liable to their principal for acts done as agents.
• Section 138 of the Contracts Act 1950 provides that no consideration is necessary to create an agency.

Types of Agency

Agreement – By Express or By Implied

• An agreement can be entered into by the principal and agent either formally or informally.
• Section 140 of the Contracts Act 1950 states that authority is express when given by spoken or written words.
• Authority is implied when inferred from circumstances, spoken or written words, or the ordinary course of dealing.

By Express Appointment

• Express appointments can be written or oral.
• A Power of Attorney is an example of a written express appointment.

By Implied Agreement

• The law can infer agency by implication when a person's words or conduct holds out another as having authority.
• If someone allows another to order goods on their behalf and habitually pays, an agency may be implied.
• Chan Yin Tee v William Jacks & Co (Malaya) Ltd [1964] MLJ 290: The appellant held out Yong as his partner, leading the respondent company to believe Yong was authorized; therefore, the appellant was liable for Yong's actions.

Agency by Ratification

• Section 149 of the Contracts Act 1950: If someone acts on behalf of another without knowledge or authority, the principal can ratify or disown the acts.
• Ratification has the same effects as if the acts were performed by authority.
• Bolton Partners v Lambert (1889): The company ratified the managing director's acceptance, binding the Defendant because ratification is retrospective.
• Kelner v Baxter [1866] LRE 2 CP 174: A contract to buy wine on behalf of a company about to be formed cannot be ratified by the company if it did not exist at the time; the agent is held to the contract unless the third party agrees to release them.
• The principal must have contractual capacity when the contract is made and at ratification.
• The principal must have full knowledge of material facts at the time of ratification and intend to ratify the contract regardless of the facts.
• Ratification must not injure the third party or their rights/interests.

Additional Note

• Ratification is the express or implied affirmation of a previously unauthorized contract made by a purported agent.
• The purported agent must have acted on behalf of the principal who subsequently ratified the action.
• The principal must know all material facts involved in the transaction.
• The agent's act must be affirmed in its entirety by the principal.
• The principal must have the legal capacity to affirm the transaction at the time the agent acts and when the principal ratifies.
• The principal must affirm before the third party withdraws from the transaction.
• The principal must observe the same formalities when ratifying the act as would have been required to authorize it initially.

Agency by Operation of Law, Usually by Necessity

• In certain circumstances, the law may grant authority on one person to act as agent for another without regard to the principal's consent.
• This is called agency of necessity in common law.
• This agency exists by operation of law and not contract.
• Rationale is often that immediate action is required and communication with the principal is impossible.
• A commercial agent by necessity occurs when someone is entrusted with another's property and must act to preserve it without authority.
• Great Northern Railway Co v Swaffield (1874): The railway company was allowed to claim reimbursement for stabling costs of a horse, even without authorization.
• Section 142 of the Contracts Act 1950: An agent has authority in an emergency to protect the principal from loss as a person of ordinary prudence would in similar circumstances.
• Conditions to satisfy 'agency of necessity':
• An emergency justifies action to preserve/dispose of the principal’s property.
• It is impossible to contact the principal for instructions.
• The agent acted in the principal’s interests.

Additional Note

• Agencies recognized by courts e.g., family relationships, emergency situations in the absence of any formal agreement, confirmation, or act or omission by the principal that implied the agent's authority. Usually deals with necessities.

Agency by Estoppel

• A principal may create an inference that an agent has authority, even without actual authority.
• If a third party relies on this to their detriment, the principal is estopped from denying the agent's authority (S.190 of the Contracts Act 1950).
• Agency by estoppel is also known as presumption of agency which means the principal may be bound by the agent's acts performed on their behalf, even without formal agreement.
• Soanes v London and South Western Railway Co (1919): The railway company was estopped from denying the porter was its agent because he wore a uniform and the company was liable for his actions.

Additional Note

• If a principal holds out to a third party that another is authorized to act on their behalf, the principal cannot later deny that the other was their agent.

Duties

Duties of an Agent to the Principal

• Duties depend on the terms of the contract of agency.
• If the contract is silent, Sections 164 to 178 of Contracts Act 1950 determine duties.

Key points

• Duty to obey the Principal's instructions unless they are unlawful (Section 164 of Contracts Act 1950).
• Duty to exercise care and diligence and use skills possessed (Section 165 of Contracts Act 1950).
• Duty to render proper accounts when required by the principal (Section 166 of Contracts Act 1950).
• Duty to pay to the Principal all sums received on their behalf (Section 171 of Contracts Act 1950).
• Duty to communicate with the Principal with all reasonable diligence (Section 167 of Contracts Act 1950).
• Duty to act in the best interest of the principal during the principal’s absence (Section 164 of Contracts Act 1950).
• Duty not to let own interest conflict with their duty.
• Duty not to make any secret profit out of the performance of their duty.
• Duty not to disclose confidential information or documents entrusted by the principal.
• Duty not to delegate their authority.

Duties of a Principal to the Agent

• To pay commission and other remuneration agreed upon unless the agency relationship is gratuitous.
• The right to commission depends on the terms of the contract.
• Not to prevent the agent from earning commission.
• To indemnify and reimburse the agent for anything done in carrying out their duties.