12 Bduk3103 Topic 8

Topic X The Law
8 on Agency
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Explain the various circumstances which give rise to a relationship
of agent and principal;
2. Distinguish the various types of agent and their scope of duties
towards the principal;
3. Elaborate the forms of authority of an agent and the effects of his
acts on the principal based on different authority;
4. Analyse the obligations of an agent to his principal and vice versa;
5. Examine the rights of an agent towards his principal, and vice
versa, where an agent or principal has failed to perform his
obligations; and
6. Elaborate the circumstances which may terminate a contract of
agency.
X INTRODUCTION
You are aware that sometimes in business and other daily activities certain
transactions are, for one reason or another, delegated to another person. The
relationship between the party that delegates and the party that carries out the
delegation is called an agency relationship. Topic 8 discusses the definitions of a
principal and an agent, how an agency relationship is formed and the capacities
of a principal or an agent.
Copyright © Open University Malaysia (OUM)

258 X TOPIC 8 THE LAW ON AGENCY
Topic 8 will explain the various categories of agent based on his capacity to bind
his principal and also based on his functions. You will also understand the types
of authority of an agent in the performance of the functions entrusted to him by
his principal. Apart from that, in this topic to you will be able to identify various
types of principal.
Since an agency relationship is also a contract, an agent and a principal owe

obligations and rights to each other. This topic will discuss each of these
obligations and rights and how a contract of agency may be terminated.
All sections referred to in this topic are sections of the Contract Act 1950
(hereinafter referred to CA 1950), unless stated otherwise.
8.1 DEFINITION OF PRINCIPAL
SELF-CHECK 8.1
What do you understand by the relationship of an agent and a

principal in a contract? Who are they?
Based on S.135, a principal is a person who employs another to do

any act or to represent him in his dealings with third persons.
In short, a principal is a person who appoints an agent to represent him in any

act. Let us understand Illustration 1, which follows.
Illustration 1:
A owns a used car dealership. He appoints a number of sales representatives to
handle his customers. If and when his sales representative makes a sale, the
contract of sale binds A and the buyer. Where the buyer intends to sue for breach
of contract, he may only sue A and not the sales representative because there is
no contractual relationship between the buyer and the sales representative.

TOPIC 8 THE LAW ON AGENCY W 259
8.2 DEFINITION OF AGENT

Section 135 defines an agent, besides defining a principal.
S.135 defines an agent as a person employed by and to do any act

for a principal in his dealings with third persons.
From the definitions of principal and agent, it may be said that an agency
relationship is a relationship where the principal delegates his powers to an
agent to represent him in his dealings with third parties.
8.3 CAPACITIES OF PRINCIPAL AND AGENT

Who has the capacity to be an agent or a principal?
S.136 provides that every principal must be a person of the age of

majority and who is of sound mind.
These are important capacities because the dealings of a principal done by his
agent with third parties form a contract. Hence the two conditions are important
to create a valid contractual relationship between the principal and the third
party.
Who has the capacity to be an agent? Section 137 explains this matter.
S.137 specifies that any person may become an agent.

Based on these provisions, it may be understood that a minor and a person of

unsound mind may become an agent. However, if the agent is a minor or a
person of unsound mind, he shall not be responsible for any act done on behalf
of his principal, as in Chan Yin Tee v Williams Jacks & Co (Malaya) Ltd.
Chan Yin Tee v Williams Jacks & Co (Malaya) Ltd.
Yong, a minor, and Chan are partners of a firm, Chan & Yong
Trading. This matter was disclosed by Chan to a representative of
Williams Jacks & Co. during a discussion. Williams Jacks & Co.
supplied goods to Yong for which they were not paid.
The court held that ChanÊs conduct caused the representative of

Williams Jacks & Co. to believe that Yong is an agent of Chan &
Yong Trading and has the power to act on behalf of Chan. Chan
& Yong was therefore liable to pay for the goods supplied by
Williams Jacks & Co.
ACTIVITY 8.1
You requested your friend, who is of unsound mind, to purchase on

credit a loaf of bread on your behalf. You enclosed a note to the
vendor stating that the purchase was for you. Your friend finished of
the bread without informing you. State, your liability, if any, to pay
for the bread.
8.4 FORMATION OF AN AGENCY
8.4.1 Appointment of Agent

How is an agent appointed? How are the powers of the principal given to the
agent?
You may observe that there are five ways of giving authority to the agent, as
shown in Figure 8.1 which follows.

Figure 8.1: Five ways of appointment of agent
(a) Express Appointment
In accordance with S.140, an express appointment of an

agent may be in writing or orally or a combination of both.
In a contract under seal, an agent must be appointed by a power of

attorney, as in Bank Bumiputra Malaysia Bhd. v Henry Ginai anak
Langgie.
Bank Bumiputra Malaysia Bhd. v Henry Ginai anak Langgie
In this case, the court held that every agent who has acted
beyond the authority stipulated in the power of attorney
does not, by his conduct, bind his principal, unless the
principal accepts or rectifies the agentÊs conduct.

(b) Implied Appointment

In accordance with S.140, in certain circumstances the appointment of an
agent may be implied from three circumstances as shown in Figure 8.1,
above.
(i) When it may be inferred from things spoken or written, or the

ordinary course of dealing that a person is an agent, as explained in
Illustration 2, which follows:
Illustration 2:
A appoints B as a sales representative at his used motor car
dealership. B transacts a Âtrade-inÊ which A allows. AÊs conduct in
allowing B to transact Âtrade-inÊ is seen as B has the authority to
transact Âtrade-inÊ in AÊs business. A is thus bound by BÊs conduct as
in Chan Yin Tee v Williams Jacks & Co. (Malaya) Ltd.
Chan Yin Tee v Williams Jacks & Co. (Malaya) Ltd
It may be inferred from ChanÊs conduct that Yong was

his partner. Therefore Chan was liable for YongÊs acts.
(ii) Husband and wife relationship

Where a husband and wife are living together, the law presumes that
the wife is an agent of the husband if the wife incurs a debt for
necessaries suitable for their condition in life.
Nevertheless, the presumption is rebuttable if the husband could

prove that:
• He has expressly prohibited his wife from incurring the debt;
• He has expressly prohibited the supplier from supplying goods or
allowing credit to his wife;
• He has sufficiently supplied his wife with the goods;
• He has sufficiently provided his wife money to purchase the
goods, without her having to incur any debt; and
• The goods, though necessaries, are unreasonable when the
circumstance of the husbandÊs income are taken into account.

(iii) Relationship among partners
Based on the Partnership Act 1961, every partner is an

agent of his other partners for the purpose of the
business of the partnership.
(c) Appointment by Ratification (Confirmation)

A relationship of agency is formed by rectification in one of two ways,
namely where there was no appointment of the agent or where there is an
appointment and the agent has acted beyond his authority as provided in
S.149.
S.149 allows the principal under both the circumstances to

elect either to disown the act, in which case the principal is
free from liabilities, or to ratify the act, in which case he is
bound to the third party.
Based on S.150, acceptance of the contract by the principal

is ratification of the authority of the agent. Such ratification
may be expressed or implied.
Let us look at a case which relates to S.150.
Waithman v Wakefield
The husband had retained goods, which were not
necessaries, bought by the wife and he refused to return
them to the seller.
The court held that the husbandÊs conduct amounts to
ratification of the contract between the wife and the seller.
Illustration 3:
A appoints B as the manager of his garment stores. B is only authorised to
purchase and sell silk garments. C offers and B purchases batik materials for A
at knock down price. A meets C and pays for the materials. Here B has acted

beyond his authority, but is subsequently ratified by A, thus causing A to be

bound by the contract made by B.
Suppose B were never appointed by A and B had purchased the batik materials
on AÊs behalf from C, A may disown or accept the purchase. If A accepts the
purchase, he is bound to the contract of sale between C and B because B has,
through ratification, become AÊs agent.
Effects of Ratification
What are the effects of ratification on the principal?
Upon ratification by the principal, all rights and obligations under the contract
become the rights and obligations of the principal. The agent has nothing more
to do with the contract.
The principal is also liable to pay the agent compensation for any loss sustained
by the agent in the making of the contract which has been ratified by the
principal, as shown in Illustration 4 which follows.
Illustration 4:
A owns a garment store. B is appointed to manage the store and is authorised to
purchase silk materials. On 1 May 2001, B bought some batik materials from C.
On 5 May 2001, A met C and paid for the batik materials. Upon AÊs payment on
5 May 2001, A is bound by the contract as from 1 May 2001.
Only under certain circumstances that ratification by the principal, binds himself
to the contract with a third party. The circumstances are:
(i) That the act of the agent was without authority or that the agent had acted
beyond his authority;
(ii) That the act of the agent is not contrary to law. Hence, a void contract or a
criminal act cannot be ratified.
(iii) The act of an agent without authority may only be ratified by the person
whom the agent claims to be his principal. Thus, if the conduct of the agent
without authority shows that he has acted on his own behalf, no other
person may ratify the contract;
(iv) Ratification may be done by the principal of the agent without authority.
However, the person must be in existence at the time of the agentÊs act.
Thus a new born baby cannot ratify the act of a person who claims to be his
agent before he was born.

S.35 of the Companies Act 1965 stipulates that a newly

incorporated company may ratify the acts of its agent
without authority done prior to incorporation.
This is an exception to the general principle that the person named or

represented as the principal must exist at the time of the making of the
contract and only then the principal may ratify the act of an agent without
authority. Where company ratifies the act of its agent done prior to
incorporation, its ratification binds the company from the date of the act of
the agent.
(v) The person who is represented by the agent without authority must have
the capacity to contract. A person who has no capacity to contract cannot
be named as a principal because he has no capacity to ratify a contract
entered into by an agent without authority. Nevertheless, a contract of
necessaries for a minor may be made by an agent without authority and
subsequently ratified by the minor. Based on S.35 of the Companies Act
1955, a contract made by an agent for the company prior to its
incorporation may be ratified by the company after its incorporation;
(vi) The person ratifying the contract must be identifiable as the person
represented by the agent without authority to be the principal. Such a
person may be identified by name or description.
(vii) Based on S.151, the person represented as the principal must have
knowledge of the important facts of the contract at the time of its
ratification. Nevertheless, if the person intends to ratify it under whatever
circumstances, such ratification without knowledge of the important facts
of the contract is a valid ratification, as in Marsh v Joseph which follows.
Marsh v Joseph
The act of the principal in ratifying the contract made by an

agent without authority does not bind the principal because
he has not been informed of the important facts of the
contract.

(viii) Ratification must be done within a reasonable time.
Grover v Mathews
The court held that a fire insurance which is rectified

subsequent to a fire is not a valid ratification.
(ix) A ratification must not have the effect of subjecting a third person to loss, or
of terminating any right or interest of a third person; and
In the Illustration to S.153, T offers certain goods to A, who without

authority accepts them on behalf of P. Before PÊs ratification of AÊs act, T
sells and delivers the goods to X. P cannot ratify the contract entered into
on his behalf by A because such ratification will deprive X of his right over
the goods which he has bought from T.
(x) The ratification by the principal of a contract made by his agent who had
acted beyond his authority must be done in total. The principal cannot
choose to ratify some parts, while rejecting some other parts.
(d) Agency by Necessity

An agency by necessity arises when a person in possession of another
personÊs property or interest must necessarily act to protect the property or
interest under an emergency situation. The person in possession of the
property or interest, although without authority, must act to protect the
property or interest, as stated in S.142.
S.142 states that an agent has authority, in an emergency, to

do all reasonable acts for the purpose of protecting his
principal from loss.
Based on S.142, what acts are said to be reasonable?
Reasonable acts are acts which would have been done by a person of ordinary
prudence under similar circumstances as the agent.

Illustration 5:
A assigned B to transport fruits from Cameron Highlands to Ampang
Supermarket in Kuala Lumpur. On reaching Kuala Lumpur, a great flood
prevented B from proceeding to his destination. The fruits needed to be
disposed of immediately before they perished. B took the fruits to and sold them
at Sungai Buloh market. BÊs act in disposing of the fruits at Sungai Buloh was
beyond his authority. However, B may in defence prove the agency by necessity.
Let us look at the following case which is similar to Illustration 5.
Great Northern Railway Co. v Swaffield
The plaintiffs, a railway company, transported horses of the

defendant to the destination as ordered. Upon arrival at the
destination, the defendantÊs representatives did not take delivery
of the horses. The plaintiffs put them up in a stable. The plaintiffs
claimed payment but the defendant refused to pay, alleging that
the plaintiffsÊ act was unauthorised.
The court held that there was agency by necessity and the
plaintiffs must be paid.
For a person to claim agency of necessity, he must prove three matters as shown
in Figure 8.2.
Figure 8.2: Three matters for proof of agency of necessity
In the explanation which follows, let us look at the elaboration on these three
matters.

(i) There was actual emergency

What is meant by ÂemergencyÊ? What is your elaboration of ÂemergencyÊ?
An emergency means a situation which forces a person to act.
Therefore, if the circumstances are that which forces a person to do such act
as would be done by a person under similar circumstances for the good of
the person who he represents, the act is said to be an act of necessity. In
this situation, the condition of emergency, facilities, expenses, time,
distance and other factors should be taken into account.
However, where an act is done for mere convenience, it is not deemed an

act of necessity, as in Sachs v Miklos.
Sachs v Miklos
The defendant was sued by the plaintiff for disposing of the

plaintiffÊs furniture which were stored with the defendant.
The defendant claimed that he had stored the furniture for
sometime and now needed the storage space. He further
claimed that he had attempted to contact the plaintiff but
failed and that he had disposed of the plaintiffÊs furniture as
an agent.
The court held that under the circumstances, there was no

emergency situation which would permit an act of necessity.
The act of an agent of necessity must be for the purpose of protecting his
principal from loss.
In accordance with S.142, the act of an agent of necessity

must be for the purpose of protecting his principalÊs
property and interest, which are in the possession of the
agent.

(ii) There was reasonable diligence to communicate with his principal
Based on S.167, the agent must prove that he had used all
reasonable diligence in communicating with his principal
and in seeking to obtain his instructions but fails, before he
acts in the manner he did. Only then there arises an agency
of necessity.
Let us look at a case similar to the provisions of this section.
Springer v Great Western Railway Company
The defendants agreed to transport by sea the plaintiffÊs

tomatoes from Jersey to Convent Garden market. Due to bad
weather condition, the ship which carried the goods arrived
the Port of Weymouth later than scheduled. Without
communicating with the plaintiff, the defendants, believing
that the goods could not be sold in good condition at
Convent Garden market, sold the goods in the neighborhood
of Weymouth. The plaintiff claimed damages in the amount
of the difference in the sale price and the price which would
have been obtained if they were sold at Convent Garden
market.
The court held that there was no agency of necessity because

the defendants had acted on his own without using all
reasonable diligence in seeking to obtain his principalÊs prior
instructions.
Sometimes, an agent may succeed in communicating with his principal but

he does not obtain instructions within a reasonable time. Under such a
circumstance the agentÊs act after a reasonable time may be deemed an act
of necessity.
(iii) The agent must act honestly and sincerely

The agent must act honestly and sincerely for the benefit of his principal,
not for his own benefit. If he has allowed his interest to override the interest
of his principal, he has breached his obligation as the agent.
What are the effects of an agency of necessity?

The effects of agency by necessity are:

(i) The agent is protected against claims for damages by his principal;
(ii) The agent is entitled to additional payment for his effort in protecting the
property of his principal and for acting beyond his authority; and
(iii) By the act of the agent of necessity there is a binding contract between the
principal and the third party.
(e) Agency by Estoppel

Agency by Estoppel is an exception to S.190, which states that a person is
not bound by a contract made on his behalf, if it was made without his
prior consent or authority.
An estoppel agent is different from an agent acting under express or

implied authority as shown in Table 8.1 which follows.
Table 8.1: Distinction between an Agent Acting under Express/Implied

Authority and Estoppel Agent
Agent Acting under Express/Implied

Estoppel Agent
Authority
3 Agent has the prior authority of the 8 The person was never an agent of
principal. the principal.
This agency arises when the conduct of the principal causes the public to
presume that the person has the authority to represent the principal. In this
circumstance, it is said that the agent has ostensible authority. The authority is
known as ostensible authority because the person, in fact, does not have the
authority, but to the public he appears to have the authority to represent the
principal, as explained in Illustration 6, which follows.
Illustration 6:
A appointed B to represent him in certain timber trade transactions.
Subsequently A terminated BÊs services for breach of trust. B then met C and
bought timber for himself, but B informed C that the timber was for A. C claimed
payment. A refused to pay on the grounds that BÊs services has been terminated.
The question is whether AÊs refusal to pay for the purchase on the grounds that
BÊs services had been terminated before the contract with C would succeed.
In the circumstances of the termination, A ought to have notified the public of BÊs
termination through the newspapers or persons who regularly carry on business
with A through B as an agent.

AÊs failure to do so may have caused C to presume that B was acting as AÊs
agent. In the circumstances, A is estopped from denying BÊs authority. A failure
to notify the public of BÊs termination causes C and other persons to believe that
B is an agent of A. BÊs acts amounts to acts of a lawful agent.
You must remember that an estoppel agency only exists where the authority of
the agent is presumed from the conduct of the principal. If the presumption is on
the agentÊs conduct, there is no agency by estoppel.
ACTIVITY 8.2
For your further information on estoppel, you may refer to the

website Legal Definition of ÂEstoppelÊ at
http://www.lectlaw.com/def/e040.htm
EXERCISE 8.1
P has been posted overseas for one month. P has purchased from K
all the daily necessaries for his wife and children, which amount to
RM1,000, needed for the period that he would be away. P also
prohibits K from supplying other goods to his family. One week
after PÊs departure, PÊs wife bought some other goods worth RM200
from K. Upon his return, P refused to Pay K.
Is P obliged to make the payment?
8.5 CATEGORIES OF AGENT BASED ON THE

SCOPE OF AUTHORITY
SELF-CHECK 8.2
In your opinion, why should there be various types of agent acting for
the principal?
There are three categories of agent based on their scope of authority as explained
in Table 8.2 which follows.

Table 8.2: Three Categories of Agent Based on the Scope of Authority
No. Categories of Agent Explanation

1. Universal Agent An agent who has absolute authority to act for
his principal in all matters.
2. General Agent An agent who has authority to act for his
principal in all his business of a particular kind.
3. Special Agent An agent who is authorised to act only for a
special purpose.
8.5.1 Universal Agent

A universal agent has the absolute authority to act for his principal to do all acts
which may be done by the agent himself or his principal.
Usually, a universal agent is created through a Power of Attorney.
8.5.2 General Agent

What are the authorities of a general agent acting for his principal?
A general agent has the authority to act for his principal in all his (the agentsÊ)
business of a particular kind only.
You may refer to Illustration 7 for clearer explanation of the authority of a

general agent.
Illustration 7:
Where a person is appointed a restaurant manager, he is a general agent to act for
his principal in relation to managing the business of the restaurant. The general
public would presume that the manager has the authority in managing all the
business of the restaurant. Where the authority of the agent is restricted, a notice
must be given to the general public, as in Wateau v Fenwick which follows.

Watteau v Fenwick
The court held that the restriction on the manager of a tobacconist

against purchasing cigars must be made known to the general
public; failure of which binds the principal to such acts of the
agent.
8.5.3 Special Agent

How about a special agent? What authority does he have?
A special agent is authorised to act only for a special purpose. His authority is
restricted to the special purpose and he shall not act beyond the authority.
8.6 CLASSIFICATION OF AGENTS ACCORDING

TO FUNCTIONS
There are five classifications of agent according to functions as shown in Table
8.3.

Table 8.3: Classifications of Agent According to Functions
Categories of Agent
No. Explanation
Based on Function
1. Del credere Agent An agent who manages the contract between his
principal and the third party and undertakes that
the third party will perform his contractual
obligations. The agent is entitled to extra
commission when he succeeds and he will be liable
if the third party fails to perform the obligations.
2. Factors A commercial agent, who in the ordinary course of
his business, is entrusted with the goods of his
principal for sale at a certain price fixed by him or
his principal. He has a lien on the goods in his
possession, as commission.
3. Brokers An agent who is employed to make a contract with
the third party on behalf of his principal but he is
not entrusted with possession of the goods.
4. Auctioneers An agent who is employed to sell goods by
auction. He is an agent for a seller during an
auction and when he accepts a bid from a buyer he
also becomes an agent for the buyer.
5. Bankers An agent for a bank responsible for the
performance of the functions stipulated by the
bank (principal) and also an agent for the
customers when dealing with them.
8.6.1 Del Credere Agents

A del credere agent manages the contract between his principal and the third
party. He ensures that the third party will perform his contractual obligations.
He is entitled to extra commission when he has succeeded in his duties. If he
fails, he will be liable. A del credere agent may also claim indemnity for all costs
incurred to make the contract on behalf of his principal. But if the third party
fails to pay the amount which would have duly been paid to his principal the
agent is not entitled to be indemnified by his principal.

8.6.2 Factors
A factor is a commercial agent, who in the ordinary course of his business, is

entrusted with the goods of his principal for sale.
If he does not disclose the name of his principal, he is not disqualified from being
an agent, provided he is in possession of the goods of his principal. He sells the
goods at a certain price fixed by him or his principal.
He has a lien on the goods in his possession, as commission from his principal.
The right of lien is only applicable on goods in his lawful possession, either
physically or constructively, as an agent. Such goods cannot be sold or disposed
of by the factor. He also does not acquire title to the goods on lien.
8.6.3 Brokers
ACTIVITY 8.3
You must have heard of the term ÂbrokerÊ. What do you understand
by the term Âbroker?Ê In addition, attempt a list of examples of a
broker which you usually hear or know.
A broker is a commercial agent who is employed to make a contract with the

third party on behalf of his principal.
He will look for buyers or sellers on behalf of his principal and he manages the
contract until an agreement is sealed between the principal and the third party.
He is paid commission, called a ÂbrokerageÊ.
A broker is not entrusted with possession of the goods. Thus, he has no right of
lien because a lien is based on possession of the goods. He is also not to make the
contract in his name.
8.6.4 Auctioneers
What are the functions of an auctioneer?

An auctioneer is an agent for the seller and the buyer.
When an auction starts off and until the auctioneer accepts a bid from a buyer, he
is an agent for the seller. There after, he is also an agent for the buyer.
He has a discretion as to the price at which the goods should be sold. If the seller
fixes a reserved price, the auctioneer will be liable to the seller if he sells the
goods below the reserved price. The contract remains binding on the seller unless
the buyer has knowledge of the auctioneerÊs restrictions.
8.6.5 Bankers
What is meant by Âbankers?Ê
A banker is, in principle, an agent for the bank.
Therefore a banker is responsible for the performance of the functions stipulated

by the bank. In certain circumstances, he is an agent for the bankÊs customers.
How does this happen? It occurs, when a banker receives and makes payment in
cash, by cheque or bill of exchange of the customer. Hence, he is an agent for the
customer.
8.7 SUB-AGENT AND SUBSITUTED AGENT
8.7.1 Sub-agent
How does a sub-agency occur? Who creates a sub-agent? A sub-agency occurs
where the agent is authorised by the agency contract and his principal to
delegate his duties to another person. The other person is a sub-agent to the said
agent. The sub-agent has no agency relationship with the principal. He is an
agent to the agent. In this situation the sub-agent becomes an agent and the first
agent becomes the principal. The rights and obligations of the sub-agent exist
between him and the agent only. The sub-agent has no right or obligation to the
original principal. Similarly, the principal too has no right or obligation to the
sub-agent.

The agent who appoints the sub-agent is liable to the principal for the acts of the
sub-agent, as stated in S.143(3).
S.143(3) states that a principal may sue the agent only or sub-
agent only or both in case of fraud or wilful wrong.
The acts of a sub-agent may bind the principal with the third party as if the sub-
agent is the first agent. Where the delegation of duties is not authorised by the
contract of agency, the agent is liable to the principal for the acts and misconduct
of the sub-agent.
The principal is not bound by the contract unless he ratifies the appointment of
the sub-agent.
SELF-CHECK 8.3
To facilitate your understanding, list the distinctions between an
agent and a sub-agent in the following table.
Agents Sub-agents
8.7.2 Substituted Agent

Which act mentions a substituted agent?
S.147 allows an agent to appoint another person to act for the

principal.
When another person is appointed, the person becomes an agent. In this

situation, the first agent loses his position.

When a person becomes a substituted agent, he becomes an agent for the

principal and the first agent loses his functions as an agent.
8.8 AUTHORITY OF AN AGENT

The act of an agent binds his principal with the third party, provided the agent
has acted with authority. The authority of the agent are categorised into two,
namely actual authority and ostensible authority. Actual authority is made up of
express actual authority and implied actual authority. For a summary of the
authority of the agent, you may refer to Figure 8.3 which follows.
Figure 8.3: Authority of the agent
8.8.1 Express Actual Authority

This category of authority is normally conferred upon the agent by an agreement
between the principal and the agent. Sometimes, it exists through a contract and
sometimes through consensual agreement. The agent who acts on a contract of
agency is entitled to commission from the principal. An agent who acts without
a contract but only on consensual agreement is, under the law, entitled to claim
indemnity for all costs he has incurred and any loss incurred as an agent, unless
there is an agreement to the contrary. A gratutious agent is not entitled to
commission because in effect the commission is the consideration from the
principal in return for the agentÊs promises to perform his obligations under the
contract of agency.
In accordance with S.140 and S.141, actual authority of the agent

may be conferred in writing or orally. Where the contract
delegated to the agent is an agreement under seal, actual authority
of the agent must be conferred by a power of attorney.

SELF-CHECK 8.4
To facilitate your revision, list the distinctions between an agent who
acts with a contract and a gratutious agent who acts without a
contract.
Voluntary Agent Who Acts

Agent Who Acts with a Contract
Without a Contract
8.8.2 Implied Actual Authority

This category of authority may be implied from two circumstances, namely
(a) Implied from the actual authority of the agent. Where an agent performs
his actual authority in the course of his duties, by implication he may do all
that is necessary for the performance of the actual authority.
Illustration 8:
A has appointed B, as a motor vehicle sales representative. BÊs actual
authority is to sell motor cars. However, B has other authority which is
reasonably necessary in the performance of his functions. For example, B by
implication, has the authority to allow prospective buyers to test drive a
motor car which he would be selling on behalf of A.
(b) Actual authority implied from ordinary practices and customs of the trade
In businesses, there are various ordinary practices and customs of the trade
which at times are common to the trade and sometimes differs among
trades, as in Watteau v. Fenwick.

Watteau v Fenwick
The principal prohibited his agent from buying cigars on credit.

The prohibition is unknown to third party. The agent bought
cigars on credit from the plaintiff and the defendant refused to
pay.
The court held that a hotel manager is ordinarily authorised to

purchase goods on credit unless there are express prohibition
which is made known to the plaintiff. The defendant is therefore
liable to make the payments because his agent has actual authority
implied from ordinary practices and customs of the trade.
ACTIVITY 8.4
You ask your younger sibling who is illiterate to purchase certain

goods from a shop. You have supplied him with a shopping list to be
showed to the shopkeeper. Suggest in which category of agent is
your younger sibling and what category of authority has he?
8.8.3 Ostensible Authority

What is meant by ostensible authority? What are the distinctions between
ostensible authority and implied actual authority?
Ostensible authority is authority of the agent which the law regards the agent
as possessing although the principal may not have consented to his exercising
such authority.
Ostensible authority arises from four circumstances as explained in Figure 8.4

which follows.

Figure 8.4: Four circumstance giving rise to ostensible authority
Detail explanation on the four circumstances which give rise to ostensible

authority of the agent are as follows.
(a) In cases which show that a person is authorised to act as if he is the agent of
another although the first person is not the agent of the second. Refer to
Barrett v Deere which follows.
Barrett v Deere
A payment of a debt was made to a person present on the

business premises of the creditor. The person appeared to be
responsible for the management of the creditorÊs business.
The court held that the payment was a payment to the

creditor through his agent with ostensible authority. The
creditor was thus not entitled to claim payment of debt from
the debtor.
(b) In cases which show that the principal has led the third party to believe that
the agent has the authority of the principal, as in Todd v Robinson.

Todd v Robinson
The Defendant has appointed an agent to purchase certain
goods from the plaintiff. The agent was authorised a
purchase limit of £31. In one transaction, the agent had
purchased and appropriated to himself goods of the price of
£45. The issue was whether the defendant was liable to pay
the £14 owed by his agent in excess of his authority.
The court held that the actual authority of the agent was
only known to the principal. The plaintiff had no knowledge
of the restriction. The defendant was therefore liable to pay
the full price of the goods.
(c) The principal allows the agent to act as if the agent has the authority
although the authority has been terminated.
Where the authority of the agent has been terminated, unless the principal
has given notice of such termination to all those who normally deal with
the agent, the principal is bound by the act of the agent. The principal only
needs to give a general notice to the public, as in Drew v Nunn.
Drew v Nunn
The defendant appointed his wife as his agent to deal with

the plaintiff. The defendant became of unsound mind and
during that time the wife continued as his agent.
Subsequently when he became of sound mind, he refused to
accept the contract made on his behalf on the grounds that
his unsoundness of mind had terminated his contract of
agency with the wife.
The court held that although his unsoundness of mind

terminated the contract of agency, the plaintiff had no notice
of such. Therefore the plaintiff was led to believe that his
agent had the authority of the principal. On that grounds,
the defendant was liable on the contracts.
(d) The principal has restricted the agentÊs express actual authority without
making it known to those who deal with the agent, as in Hely-Hutchinson v
Brayhead Ltd. & Anor.
Hely-Hutchinson v Brayhead Ltd. & Anor.
The judge stated that when the board of directors restricted the
authority of the managing director to contract up to £500 only
unless with the authority of the board, the actual authority was
limited to the amount. However, his ostensible authority included
all authority ordinarily possessed of a managing director. The
company is bound by an act of the managing director which
exceeded the amount where the third party had no knowledge of
the restriction on his authority.
Essential Elements to Prove Ostensible Authority

Three elements are necessary to prove ostensible authority, as in Figure 8.5 which
follows.
Figure 8.5: Three essential elements to prove ostensible authority
(i) The representation of the principal on the authority of the agent is known
to the general public
Based on S.190, belief of the authority of the agent arises by

implications from the words, conduct or prior practices of
the principal. The principal cannot deny the authority of his
agent.
Would you be able to distinguish between ostensible authority and implied

authority? Refer to Table 8.4 for the distinction.

Table 8.4: Distinction between Ostensible Authority and Implied Authority
Ostensible Authority Implied Authority
Based on the representations of the Based on an agreement between the

principal. principal and his agent.
The representation is made by the principal or a person authorised by him. A

representation made by the agent is not recognised in law as in Freeman and
Lockyer v Buckhurst Park Properties Ltd.
Freeman and Lockyer v Buckhurst Park Properties Ltd.
The second defendant is a director of Buckhurst Park Properties

Ltd., who is the first defendant. The second defendant sought the
assistance of the plaintiff to obtain development approval on a
piece of land from the authorities. The plaintiff claimed payment
for his services but the first defendant refused to make payment
on the grounds that the second defendant was never appointed
the companyÊs managing director. Therefore he was not
authorised to represent the company.
The court held that the company was liable because the board of
directors knew and had allowed the second defendant to act as
the director though he was not duly appoint such. Since the board
is the ÂorganÊ of the company authorised to manage the company,
the conduct of the board of directors in allowing one of their
members to act as a director has led the third party to believe that
the second defendant has the authority of the first defendant.
(ii) The third party relies on the representation

It has been explained that the representation must have been made to the
third party. The third party must prove that he has relied on the
representation of the principal and believe that the agent has the authority
of the principal. He must further prove that the contract was induced by his
reliance and belief, and not caused by any other matter.
(iii) Loss to the third party

The third party has relied on the representation and belief of the authority
of the agent and consequently does an act which changes his position or
cause him losses.

When all the three elements have been proved, only then the third party
could bind the principal to the contract made by his agent on his behalf.
EXERCISE 8.2
Your friend meets and enquires from you whether the acts of his
agent whose authority has been terminated would bind him with the
third party. Explain to your friend.
8.9 CATEGORIES OF PRINCIPAL

Let us now look at the categories of principal. Principals may be categorised into
three, as shown in Figure 8.6,
Figure 8.6: Three categories of principal
8.9.1 Named Principal

Sometimes an agent in the course of making a contract on behalf of his principal
expressly informs the third party the name of his principal. Under such a
circumstance, the agent with actual authority, whether express or implied, will
bind his principal with the third party to the contract. If the agent has acted in
excess of his authority and the principal ratifies it or that there was an agency of
necessity, the principal is bound by the contract with the third party. Similarly,
the principal is bound by the contract if it is proved that the agent has ostensible
authority of the principal.
S.183 states that the agent who acts for a named principal is not
bound by the contract which he makes and that he has no right to
enforce it.

According to S.179, where an agent has acted within his authority, his acts bind
the principal as if the principal has acted on his own behalf. However, under
certain circumstances, the agent is liable for his own acts, namely:
(a) Where the agent agrees to be liable on the contract which he has made on
behalf of his principal, as in Ching Yuen Tung v BEP Akitek, which follows:
Ching Yuen Tung v BEP Akitek
The appellant is the agent of an American company based in

New York. The respondent is an estate valuer appointed by
the appellant to undertake the valuation of a piece of land in
Sandakan. The appellant has requested the respondent to
send the valuation report direct to the American company.
The appellant and the respondent have regular prior
dealings. The appellant has stated that the manner of
payment of the fees is as they have normally dealt with. The
respondent claimed payment but the appellant refused to
pay the fees on the grounds that he was only an agent of the
foreing principal.
The court held that based on the statements of the agent, the
appellant was personally liable to pay the fees although he
has merely acted on behalf of his principal.
(b) Where the agent has contracted in his own name, unless he is an agent
under a power of attorney;
(c) Where the agent has signed a negotiable instrument in his own name; and
(d) S.164 stipulates that when an agent has acted in excess of his authority he is
personally liable, unless he has acted under an agency of necessity, under
an ostensible authority or the principal rectifies his acts.
SELF-CHECK 8.5
Write down what is meant by a named principal.

8.9.2 Disclosed Principal

Firstly we need to know what is meant by a Âdisclosed principalÊ.
A Âdisclosed principalÊ means a principal whose existence is disclosed to the

third party by the agent but whose identity is unknown. The third party
knows that he is dealing with the principal through the agent.
Is the principal liable for the acts of the agent in dealing with the third party?
S.183 stipulates that the principal is not liable for the acts of the
agent in dealing with the third party where the agent has not
disclosed the name of the principal.
Other than that, according to S.183 when a foreign buyer or seller buys or sells
goods through a local agent, the buyer or seller contracts with only the agent.
The foreign buyer or seller has no contract with the seller or buyer of the goods
unless the foreign buyer or seller has all along intended to contract with the local
seller or buyer and the agent merely acts as the foreign buyerÊs or sellerÊs Âspokes
personÊ. To understand this, look at Illustration 9.
Illustration 9:
A who is in the United States contracts to purchase timber from B in Sarawak
through C. Based on S.183 the contract is deemed a contract between A and C,
unless A intends to make other future contracts with B through C as AÊs
spokesperson.
Where the agent does not disclose the existence of or name his principal, the
agent is personally liable to the third party. The agent remains personally liable
to the third party if, where subsequent to the making of the contract, the third
party knows of the principal.
Finally, the agent is also personally liable if the law prohibits the principal,
whether disclosed or named, from being sued, such as a minor in a contract
which is not a contract of necessaries.

8.9.3 Undisclosed Principal

Where an agent does not disclose that he is acting on behalf of a principal, the
third party is bound by the contract with the agent.
According to S.186 the third party who does not know of or

suspect the existence of a principal of the person whom he deals
with has the right to sue the agent and also the principal after he
discovers the existence of the principal.
The liabilities of the agent and the principal are joint and severable.
Joint and severable means that the third party may sue the agent only and
where the findings of the court are not fully satisfied by the agent, the third
party may then sue the principal.
Other than that, the third party may sue both the agent and the principal,
provided that the third party has not acted in a manner which estoppes him from
suing one and not the other; that is the agent or the principal. To understand
this, let us look at Illustration 10.
Illustration 10:
A contracts with B. Subsequently A discovers that B was acting on behalf of C
but A does not claim the price for the goods long after the contract was made.
AÊs delay induces C to believe that A has settled his claims from B. Here A has
acted in a manner which estoppes him from suing C after A has discovered the
existence of C.
An undisclosed principal may, after his existence is discovered enforce the

contract with the third party. Nevertheless, based on S.184, the third party has
the right to revoke the contract if the identity of the principal is essential to the
contract.
An example of where the identity of the principal is essential to the contract is a

contract which requires personal skills of the principal, such as a famous
craftsman, painter and others.
The principal cannot enforce the contract if the terms of the contract are contrary
to the existence of the contract of agency, as it happens in Humble v Hunter.

Humble v Hunter
The court states that when a charterparty is contracted in such a
manner as if the agent is the principal, the principal cannot
enforce the charterparty.
Nevertheless, it must be remembered that where a person acts in a manner as if

he is an agent of another, whereas the contract is for his benefit, the purported
agent cannot enforce the contract (S.19).
Table 8.5 explains the three categories of the principal and their effects of the
contract.
Table 8.5: Effects of Contracts According to the Categories of the Principal
No. Categories of Principal Effects of Contracts
1. Named Principal The agent is not bound by the contract he makes

with the third party and he cannot enforce the
contract. All acts are deemed as if acts of the
principal on his own behalf.
2. Disclosed Principal The principal is not bound by the contract. The

agent is liable. Personally made known.
3. Undisclosed Principal The third party is bound by the contract made

with the agent. The third party has the right to
sue the agents and the principal.
SELF-CHECK 8.6
Compare the liabilities of a named principal with those of an

undisclosed principal.

8.10 DUTIES OF AN AGENT
SELF-CHECK 8.7
Suppose you are an agent of your employer who deals in the

import and export of luxury motor vehicles. What are your duties
to your principal?
What are the duties of an agent and how do they arise? The duties of an agent
arise from a relationship of agency through an agreement, whether expressed or
implied, and the duties of the agent and the principal depend on the terms of the
contract of agency.
Where the contract does not stipulate the duties of the agent and the principal,
S.164 to S.178 of the Contracts Act explain the scope of duties of both the parties.
You may refer to Figure 8.7 on ten duties of an agent.
Figure 8.7: Ten duties of an agent

8.10.1 Obey to the Instructions
According to S.164, the agent must obey the instructions of his

principal.
As a representative of his principal, the agent must obey the instructions of his
principal which are not contrary to law. If the agentÊs failure to obey the lawful
instructions of his principal causes loss to the principal, the agent is liable for the
loss because he has breached his duties, as it has happened in Turpin v Bilton.
Turpin v Bilton
The failure of the agent to insure his principalÊs ship has been held
by the court as a breach of the agentÊs duties and thus he is liable
for the loss incurred by his principal.
ACTIVITY 8.5
Your must have had participated in a team assignment. Imagine you
are the leader of a team project. How do you ensure that your
instructions as the team leader are obeyed by the team members?
What are the possible losses if your instructions are not obeyed by the
team members?
8.10.2 In the Absence of Instructions, to Act According

to the Customs
Where the principal does not give instructions to the agent, based on S.164 the
agent must act according to the customs which prevail in doing business of the
same kind.

According to S.164, failure of the agent to act in such manner

renders the agent liable for any loss sustained by the principal.
B has appointed A as his agent to sell film compact discs. B has not given A any
instruction with regards to his duties to sell the goods. It is a customary practice
in the trade that the seller allows the buyer to view the film before purchase. A
does not allow test viewing of the films and as a consequence no sale is made. B
incurs losses. If B could prove that test viewing of film before purchase is a
customary practice in the trade in Malaysia, A has failed to perform his duties as
an agent and is liable for the losses sustained by B.
8.10.3 Use Skills and to Exercise Care and Diligence

An agent must use the skills that he has and also exercises care and diligence in
the performance of his duties.
When an agent is appointed for his professional skills, he has to display such
skills as is generally possessed by people engaged in a similar profession. What
is meant by such professional skills?
Where the agent is appointed not for a particular skill, he must exercise due
diligence and use whatever skills that he possesses in the performance of his
duties. Therefore, if the agent enters into a contract, he must endeavour to get
the best offer for his principal. Let us look at the following case.
Keppel v Wheeler
The defendant was employed to sell a house owned by the

plaintiff. The plaintiff, who is the principal, received an offer
which he conditionally accepted Âsubject to a contractÊ. The agent
received a better offer from a buyer but the agent did not inform
the principal. A contract was signed between the principal and the
first buyer.
The court held that the agent is liable to pay the difference in the
two prices to his principal.

The conclusion from the above case is that the agent must inform his principal of
all current information which he has and which may influence the decision of the
principal in his action, as in the case of Phillips v Barns.
Phillips v Barns
The court held that although an agent appointed through a power

of attorney need not obtain his principalÊs instructions, he is still
obliged to inform his principal of accurate and useful information
for his action.
Where an agent is in possession of some important information which may

induce the principal to contract, such information must be made available to the
principal. Failure to do so may cause the agent to lose his due remuneration and
commission from the principal. This matter was held in Heath v Parkinson.
8.10.4 Render Proper Accounts
Based on S.166, the agent must, on demand, render proper

accounts to his principal.
The agent must prepare true accounts on all dealings handled by him on behalf
of his principal.
8.10.5 Pay All Sums Received on Behalf of the

Principal
As stated in S.171, the agent must pay his principal all sums received on the
principalÊs behalf.
S.171 makes it mandatory on the agent to pay all sums received on

behalf of his principal.

Nevertheless, S.170 allows the agent to retain or deduct, out of any sum received
on behalf of his principal, the following items:
(a) All reasonable expenses or advances incurred by the agent in carrying out
his duty;
(b) His commission and other remuneration payable to him for acting as agent
and
(c) S.174 also gives the agent the right of lien on his principalÊs property in his
possession until his remuneration is paid.
Let us look at Valla Mal v Buddhu Mal which relates to S.170.
Valla Mal v Buddhu Mal
The court granted the agent who was employed to purchase

goods for his principal, recovery of the cost of the purchases
which the agent had incurred from the sale of the goods of his
principal in his possession after having notified and agreed to by
his principal.
8.10.6 Communicate with the Principal in Cases of

Emergency or Difficulties
Based on S.167, the agent must communicate with his principal

when in an emergency or difficulties.
The agent must use all reasonable diligence to communicate with and in seeking
to obtain instructions from his principal under such circumstances. If he has used
all reasonable diligence and still fails to communicate with his principal, then all
actions of the agent under such circumstances are deemed necessary and the
principal is bound by those actions. This matter is provided in S.142.

8.10.7 Act Honestly in the Interest of the Principal

An agent acts on behalf of his principal in dealings authorised by the principal.
Therefore the agent must act honestly and sincerely in the interest of his principal
and not to let his personal interest conflict with his principalÊs.
An agent cannot become a party in a transaction which is against his principalÊs

interest, as in Armstrong v Jackson and Wong Mun Wai v Wong Tham Fatt and
Anor.
Armstrong v Jackson
The principal had instructed his agent to purchase shares on his
behalf but the agent, without the knowledge of his principal, sold
his shares to the principal.
The court held that the agent has acted for his personal interest.
Wong Mun Wai v Wong Tham Fatt and Anor

The court found the agent has failed in his duties when he
disposed of the principalÊs land to his wife at a price much lower
than the market price.
An agent should not concurrently act for two principals, unless consented to by
both the principals. An agent must maintain the confidentiality of all dealings
which he handles on behalf of his principal. Refer to Lyell v Kennedy.
Lyell v Kennedy
The court states that the agent has a duty to keep the property and
money of his principal separately for his personal property and
money.
This duty is similar to that of a trustee. If the agent enters into any transaction in
conflict with his principalÊs interest, such as when he sell his property to his
principal without the knowledge of the principal, the agent may be ordered to
return to his principal all benefit which he has received. The order may be
granted even where the principal does not sustain any loss.

8.10.8 Not to Make Secret Profit

In the performance of his duties, an agent must not make secret profit. What is
secret profit? A secret profit may be in the form of a commission, a bribe and any
other remuneration given to the agent by another person.
S.168 explains that when an agent makes secret profit, the principal may do any
or all the five actions as listed in Figure 8.8.
Figure 8.8: Five actions available to the principal when

his agent makes secret profit
The cases in relation to the second action (claim on the secret profit) are Tan
Kiong Hwa v Andrew S.H. Chong and Mahesan v Malaysian Government
Officers Cooperative Housing Society.
Tan Kiong Hwa v Andres S.H. Chong
The plaintiff bought a flat from a company. He requested the

defendant, a director of the company, to sell his flat for RM45,000.
The defendant sold the flat for RM54,000 and deposited the
RM9,000 profit into the companyÊs bank accounts. The court held
that the profit may be claimed by the plaintiff because it is a secret
profit made by the agent in breach of his duties to his principal.

Andrews v Ramsay and Co. is a case in reference to the third action where the
principal is entitled not to pay the agentÊs commission and other remunerations if
the agent has made secret profit.
Andrews v Ramsay and Co.
The principal instructed his agent to sell a certain piece of land

and agreed to pay the agent £50 commission. The agent received
£100 deposit from the buyer and he gave £50 to the principal and
retained the balance, with the consent of the principal, as his
commission. Subsequently the principal discovered that the agent
had received a further £20 from the buyer.
The court granted the principalÊs claim to recover the £50

commission and the £20 which the agent had received from the
buyer.
The following case relates to the fifth action where the principal may sue the
agent and the third party who bribes the agent to recover damages for any loss
which he has sustained as a consequence of entering into the contract.
Mahesan v Malaysian Government Officers Cooperative Housing

Society
The court allowed the respondent to recover either the secret

profit or actual loss which they have sustained as a consequence
of the agent making secret profit in the form of a commission from
the buyer.
8.10.9 Not to Disclose Information and Documents

Entrusted by the Principal
An agent is responsible for the information and documents of his principal and
he must not disclose confidential information or any document entrusted to him
by his principal.

8.10.10 Not to Delegate Authority

An agent cannot delegate his authority to another because the agency
relationship is privy to the principal and agent. Nevertheless, there are six
circumstances where delegation of authority is permissible, as shown in Figure
8.9.
Figure 8.9: Six circumstances which allows delegation

of the agentÊs authority
EXERCISE 8.3
Discuss four duties of the agent to his principal based on Part X of
the Contracts Act 1950.
8.11 DUTIES OF A PRINCIPAL

Under the law on agency, the principal must perform certain duties to his agent.
The duties of a principal to his agent are provided in S.175 to S.178 of the
Contracts Act.

8.11.1 Pay Commission or Remuneration

The principal must pay to his agent commission or other agreed remuneration,
unless the agency relationship is gratuitous.
The agent is entitled to the agreed commission even where the dealing is
unsuccessful caused by the failure of the principal or the third party. Where the
failure is caused by the agent, he loses his entitlement to the commission. Where
the agentÊs failure brings benefit to him, the principal is not obliged to pay the
agent commission, as explained in Illustration 12.
Illustration 12:
B appoints A to sell certain plots of land at a fixed price to a millionaire. A sold
90% of the plots of land to the millionaire who refuses to purchase the balance
10% of the land. With BÊs knowledge, A sold the balance at a much cheaper price
to some other person. In such circumstances, A is only entitled to 90% of the
agreed commission. He is not entitled to the balance 10% of the commission. He
must also pay the principal the loss which the principal sustained on the sale of
the balance 10% of the land.
8.11.2 Not to Prevent Agent from Performing His

Functions
The principal cannot willfully prevent or hinder the agent from performing his
functions and earning his commission. Nevertheless, the principal may still
continue to manage the business which has been delegated to his agent, as in
Christie, Owen & Davies v Rapacioli.
Christie, Owen & Davies v Rapacioli
The principal has appointed an agent to find a buyer for his land.
The agent succeeded in finding a buyer and he put the buyer in
communication with his principal. The buyer paid the purchase
deposit and signed one copy of the contract. Subsequently, the
principal refused to complete the sale.
The court held that the agent is entitled to his commission because
he has performed his duties. The deal failed because of the
conduct of the principal.

8.11.3 Indemnify and Reimburse His Agent

As provided in S.175, the principal is obliged to indemnify and reimburse his
agent for advances made by the agent in the performance of his duties.
S.175 allows the agent to claim reimbursement on all costs

advanced by the agent in the course of performing his duties as
the agent.
Let us refer to Hichens, Harrison, Woolston & Co. v Jackson & Sons, which is a
case relating to this section.
Hichens, Harrison, Woolston & Co. v Jackson & Sons
The court held that the principal is obliged to pay his agent all
expenses incurred and all sums advanced by his agent.
If however the agent has incurred the expenses in respect of matters not
authorised by the principal or negligently, the agent is not entitled to
reimbursement from his principal. The agent is personally liable for such
expenses.
Based on S.176, the principal is liable to pay damages to the third

party in consequence of the acts of his agent, so long as the agent
has acted in good faith.
Finally, the agent is also entitled to damages or compensation for the negligence
of his principal.
Based on S.178, an agent is entitled to compensation or damages

for any injury caused to the agent by the principalÊs negligence or
want of skill.

To understand this section better, you may refer to the Illustration to S.178.
SELF-CHECK 8.8
Recall the duties of a principal to his agent. List those duties.
8.12 TERMINATION OF AGENCY

How is an agency relationship terminated? The agency relationship may be
terminated in certain manner. Upon termination of the agency, all acts of the
agent do not bind the principal. They have no more right and obligation to each
other, except for the existing rights and obligations.
S.154 to S.163 of the Contracts Act explain the manner of terminating an agency.
These provisions do not prevent other possible ways of terminating an agency.
Termination of an agency may be done by a notice of termination/renounciation

of authority or by operation of law.
8.12.1 Notice of Termination or Renunciation of

Authority
An agency may be terminated by agreement of both parties, namely the agent
and his principal or when the agent gives notice of renounciation of authority to
his principal.
S.154 states that an agency is terminated by the principal revoking

his authority or by the agent renouncing the business of the
agency.
Other than that, we may also refer to S.160 on termination of the contract.

According to S.160, revocation or renounciation of the authority

may be expressed or may be implied from the conduct of the
principal or agent.
A reasonable notice of revocation or renounciation must be given to one another.

If the principal fails to give notice and thereby causes loses to the agent, the
principal is liable in damages to the agent. Similarly, when the agent fails to give
a notice of renounciation, he is liable in damages to his principal.
What is meant by a reasonable notice? Let us refer to Sohrabji v Oriental Security

Assurance Co. and Syarikat Jaya v Star Publication (M) Bhd. for the meaning of a
reasonable notice.
Sohrabji v Oriental Security Assurance Co.
The Indian court held that a 3ó month notice is insufficient to

terminate the agency relationship which has been in existence for
50 years.
Syarikat Jaya v Star Publication (M) Bhd
The court held that a notice given 6 months prior to the

termination of the agency is a reasonable notice.
Why are there differences in the notice period? In brief, whether a notice is
reasonable or not depends on the facts and the circumstances of each case, such
as the duration of the existence of the agency, the nature of the agency
relationship and others.
S.158 states that if the principal fails to give a notice of revocation

or gives an insufficient notice, he is liable in damages to the agent
in the amount which the agent would have received if the agency
had continued.

How is the amount determined? Such amount may include the commission or
other remuneration. The amount may also include cost incurred by the agent in
the performance of his duties prior to the termination by the principal.
The same obligations are imposed by law on the agent if he renounces the
agency.
According to S.159, an agent must give reasonable notice to his

principal.
Failure of the agent to do so would cause the agent liable in damages to his
principal.
The liberty of the principal to terminate the agency is restricted by certain

matters.
(a)
S.155 states that where the agent has an interest in the
property which forms the subject matter of the agency, the
agency cannot, in the absence of an express contract, be
terminated to the prejudice of such interest.
Illustration 13:
Illustration (a) to S.155, A gives authority to B to sell AÊs land, and to pay
himself, out of the proceeds, the debt due to him from A. A cannot revoke
this authority, nor can it be terminated by his unsoundness of mind or
death.
From the illustration, it could be observed that B has an interest in the

property which forms the subject matter of the agency. The payment of AÊs
debt due to B from the proceeds of sale of the land is the interest which
would be defeated if the agency is terminated.
Such an agency is termed an irrevocable agency.
(b)
Based on S.157, the principal cannot revoke the authority
given to his agent after the authority has been partly
exercised.

For better understanding, refer to Read v Anderson.
Read v Anderson
The court stated that the principal cannot revoke the

authority after the agent had sustained loses in bets
instructed by the principal. The principal was liable to
reimburse his agentÊs advances.
From this case it could be concluded that the principal cannot avoid his
existing obligations by revoking his authority.
(c) The Agent Must Be Informed of the Revocation of Authority

If the revocation is not made known to the agent, the principal remains
binding to the acts of the agent until the revocation of authority is made
known to the agent. All acts of the agent before he has knowledge of the
revocation bind the principal.
Illustration 14:
A instructed B to sell AÊs goods. A agrees to pay 5% commission from the
proceeds of the sale. A subsequently revokes his authority by a letter to B.
Before receipt of the letter, B has sold the goods for RM100. The sale
contract binds the principal and B is entitled to the 5% commission, which
is RM5.
Where the revocation of authority is not known to the third party, the
principal is liable for the acts of his agent. The reason is that third party
only knows of express or implied authority of the agent to a third party, so
long as the two categories of agency is not revoked, the agent has the
authority to act for his principal. Therefore, the principal is liable for the
acts of his agent because of the existence of ostensible authority.
The principal may be excluded of liability if he could prove that the third
party has due notice whether from the principal or from other sources. A
constructive notice of the revocation is deemed good notice on the third
party. An example of constructive notice is a public notice in a national
newspaper.

8.12.2 Termination by Operation of Law

There are five circumstances where an agency is terminated by operation of law.
(a) S.154 states that an agency is terminated by the completion of the business
of the agency.
(b) Where the agency is created for a specified period, the agency is terminated
on expiration of the period, unless there is an express term that it shall
continue until completion of the agencyÊs business.
(c) According to S.154 and S.151 an agency is terminated by either the

principal or agent dying or becoming of unsound mind. This principle is
based on the privity of relationship between the principal and his agent.
Where the agent or the principal is unable of continuing the agency, the
agency is deemed terminated.
(d) S.154 also stipulates that when the principal is adjudicated a bankrupt,
generally the agency is terminated, unless there are contrary provisions in
the contract of agency.
(e) An agency may be terminated caused by circumstances which invalidate the

agency. Such circumstances include frustration of contract which you have
learned in Topic 3 Part 3.3; for example a breakout of war, amendment to law,
or when the goods which form the subject matter of the agency are destroyed.
SELF-CHECK 8.9
This topic explains how a contract of agency may be terminated.
What is the best and most effective way of giving a notice of
revocation of authority to the agent? Explain.
EXERCISE 8.4
Which of the following is one of the duties of a principal?

A. To act according to customs.
B. To render proper account.
C. To exercise care and diligence.
D. To pay commission and remuneration.

• Topic 8 has explained that a contract of agency involves two individuals,

namely an agent and a principal; which is that an agent need neither be an
adult nor of sound mind.
• The effect of a lack of capacity of the agent is only between the agent and his
principal, that is the principal cannot make a claim on the agent. The acts of
an agent who lacks the capacity still binds the principal with the third party
provided that the principal is an adult and of sound mind. This topic also
shows how an agency is formed by express authority, implied authority, and
in situation of necessity, based on ratification of the principal and also on
estoppe.
• There are two categories of agent based on the scope of authority and
according to functions. Other than that you have also seen the categories of
the agentÊs authority, namely express actual authority, implied actual
authority and also ostensible authority.
• You have also learned the categories of principal that is named principal,
disclosed principal and undisclosed principal.
• The duties of the agent to his principal and the duties of the principal to his
agent.
• Finally you have learned the manner of termination of contract by revocation
of authority by the principal, renounciation of authority by the agent and by
operation of law.
Agency by necessity Principal

Agent Appointment by rectification
Estoppel agent Secret profit
Express appointment
Implied appointment

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Topic X The Law

Copyright © Open University Malaysia (OUM)

Since an agency relationship is also a contract, an agent and a principal owe

8.1 DEFINITION OF PRINCIPAL

What do you understand by the relationship of an agent and a

Based on S.135, a principal is a person who employs another to do

In short, a principal is a person who appoints an agent to represent him in any

Copyright © Open University Malaysia (OUM)

8.2 DEFINITION OF AGENT

S.135 defines an agent as a person employed by and to do any act

8.3 CAPACITIES OF PRINCIPAL AND AGENT

S.136 provides that every principal must be a person of the age of

S.137 specifies that any person may become an agent.

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Based on these provisions, it may be understood that a minor and a person of

Chan Yin Tee v Williams Jacks & Co (Malaya) Ltd.

The court held that ChanÊs conduct caused the representative of

You requested your friend, who is of unsound mind, to purchase on

8.4 FORMATION OF AN AGENCY

8.4.1 Appointment of Agent

Copyright © Open University Malaysia (OUM)

Figure 8.1: Five ways of appointment of agent

(a) Express Appointment

In accordance with S.140, an express appointment of an

In a contract under seal, an agent must be appointed by a power of

Bank Bumiputra Malaysia Bhd. v Henry Ginai anak Langgie

Copyright © Open University Malaysia (OUM)

(b) Implied Appointment

(i) When it may be inferred from things spoken or written, or the

Chan Yin Tee v Williams Jacks & Co. (Malaya) Ltd

It may be inferred from ChanÊs conduct that Yong was

(ii) Husband and wife relationship

Nevertheless, the presumption is rebuttable if the husband could

Copyright © Open University Malaysia (OUM)

(iii) Relationship among partners

Based on the Partnership Act 1961, every partner is an

(c) Appointment by Ratification (Confirmation)

S.149 allows the principal under both the circumstances to

Based on S.150, acceptance of the contract by the principal

Let us look at a case which relates to S.150.

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beyond his authority, but is subsequently ratified by A, thus causing A to be

Copyright © Open University Malaysia (OUM)

S.35 of the Companies Act 1965 stipulates that a newly

This is an exception to the general principle that the person named or

The act of the principal in ratifying the contract made by an

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(viii) Ratification must be done within a reasonable time.

The court held that a fire insurance which is rectified

In the Illustration to S.153, T offers certain goods to A, who without

(d) Agency by Necessity

S.142 states that an agent has authority, in an emergency, to

Based on S.142, what acts are said to be reasonable?

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Let us look at the following case which is similar to Illustration 5.

Great Northern Railway Co. v Swaffield

The plaintiffs, a railway company, transported horses of the

Figure 8.2: Three matters for proof of agency of necessity

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(i) There was actual emergency

An emergency means a situation which forces a person to act.

However, where an act is done for mere convenience, it is not deemed an

The defendant was sued by the plaintiff for disposing of the

The court held that under the circumstances, there was no