The Law of Agency in Malaysia

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Date added: 17-06-26


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The basic concept of an agency is concerned about the relationship between one person, the principal and another, the agent where a principal entrusts the business to an agent and allows the agent to act on behalf of the principal in dealing with third parties according to Section 135, Contracts Act 1950. For example, Sabrina instructs Ivan to purchase some goods on her behalf, Sabrina is the principal while Ivan is her agent. Therefore, the agent is granted the authority to fulfil his principal’s instruction to deal with third parties. The core of the agency relationship is built on trust. The principal must trust that the agent will work according to the terms of agency agreement and for the benefits of the principal. The principal could suffer loss off money, opportunity and reputation if the agent abuses his authority. Also, the agent must trust that the principal will pay for their work. The law of agency in Malaysia is governed by Part X of the Contracts Act 1950. Anyone can become a principal or an agent as long as the person is age of majority and of sound mind as stated in Section 136 and Section 137, Contracts Act 1950 respectively. Examples of agents including brokers, insurance agents, travel agents, and lawyers. Agents are important in business as they reduce cost to access to market conveniently and effective in sales distribution channel. Thus, an agency can takes effect in two types of contracts. The first contract is made between the principal and the agent who has his authority delegated by the principal to act for and on behalf of the principal. The second contract however is made between the principal and the third party. An agency can be formed in many different ways similar to creating a contract, contract of agency can either be express or implied depending on the circumstances. Express or implied agreement can form an agency contract where no consideration is needed. This also means that the authority of an agent can be expressed or implied. Express authority happens when the principal delivers an oral or written communication stating the nature of authority. The scope of an agent’s express authority is based on the appropriate construction of terms of the agreement. Therefore, instructions from the principal must not be ambiguous as the principal will bound to the terms when the agent had clearly interpreted the instructions in a manner not intended by the principal. For example, in Ireland v Livingston, the instructions from the principal was uncertain and can be interpreted into multiple possible manners. Implied authority however arises when it is inferred from the behaviour of the parties and the circumstances of the case. The case of Hely-Hutchinson v Brayhead Ltd clearly shown the creation of agency through implication. The Court of Appeal held that Mr Richards had authority to enter into the guarantee implied from the circumstances where he had entered various contracts on behalf of the company previously. For Sarah’s case, she has specifically appointed Ian as her assistant in helping her to manage the art gallery during her business trip. One can say that agency does not exist between Sarah and Ian as written agreement was absent. However, express appointment can be in written or oral form. In order to be effective in appointing an agent, a letter written or words spoken is adequate. In KGN Jaya Sdn Bhd v Pan Reliance Sdn Bhd, the court of Appeal held that the law does not require that an agency agreement must be in writing. Further, no formality is need to conduct express authority according to Heard vs Pilley 1869. The agreement of agency was created under express agreement and express authority has been delivered from Sarah to Ian when she instructed him to take care of the art gallery. Therefore, an agency is formed between Sarah and Ian when she arranged him to become her assistant. Ian as the assistant of Sarah acted as an agent which involve in negotiation for sales of goods on behalf of Sarah. Sarah also gave specific instructions to Ian that he is not allow to offer any discount on displayed items without consulting her and he is not to purchase any new item without verifying with her. In other words, Ian must seek the approval from Sarah before selling and buying items for the art gallery. Therefore, it is reasonable that no ambiguity shall arise as Sarah’s instructions are directed and interpreted clearly. There are a few duties toward the principal that an agent must follow. According to Section 164, Contracts Act 1950 an agent is bound to conduct the business of his principal according to the instructions given by the principal, or, in the absence of any such instructions, according to the custom which prevails in doing business. As an agent, Ian is bound to comply several duties towards his principal, Sarah. The first one is the duty of fiduciary. This is closely related to the law of trusts as the agent is expected to follow the principal’s instructions with honesty and integrity and to manage the business of the agency carefully with the skills he acquires to avoid making any mistakes in Section 165 of Contracts Act 1950. This can be used to protect the principal if the agent abuses his authority. In the case of Parker v McKenna, an agent is required to act for the best interest of the principal because fiduciary relation is referred as a principle “founded at the highest and truest morality”. If the agent’s action conflicts the interest of the principal’s, then the agent has violated the fiduciary duty. This is shown in the case of Armstrong v Jackson where the agent instead of purchasing shares for the company, he sold his own shares. It was conflicted with the principal’s interest as the principal wanted the lowest price possible. Therefore, Ian’s duty is to manage the art gallery carefully with good faith according to Sarah’s instructions and for the benefits of Sarah while not to make any unnecessary mistakes so that violation of fiduciary duty can be avoided. Next, every agent owes the principal the duty of reasonable care where the agent must take reasonable steps to protect the assets and interests of the principal. Failure to do so will lead to a breach of agent’s duty of reasonable care. For example in Keppel v Wheeler and Another, it was held that the agent was liable to pay the difference of the price of two offers as he ignored the second offer which proposed a higher price. Thus, in Sarah’s case, Ian has the responsibility to take care of Sarah’s assets including all the artwork in the art gallery while dealing with any third parties. In addition, agents also owe the principal the duty of obedience which requires agents to follow all lawful and appropriate instructions given by the principal in dealing with third party in the business. Agents will be liable for the damages as result from failing to obey principal’s instructions in accomplishing the purpose of the agency. Related cases including Turpin v Bilton where the agent was liable for the damages of failing to insure the ship while the ship was lost. In addition, in Bostock v Jardine, the agent was liable as he purchase more than what he was instructed. So, it is essential for Ian to follow exactly the instructions from Sarah in managing the art gallery which he must inform and obtain the approval from Sarah if he wants to make any business transactions of selling artwork or buying any items for the art gallery. It is also an important duty for agent to communicate with his principal in order to seek for suitable instructions by using all reasonable methods. Communicating with principal including submitting and informing all information that is relevant to the agency. Even in emergency situations, agents are required to obtain the instructions from the principal before making any decisions without the principal’s knowledge. In Springer v Great western Railway Company, the agent was liable for the damages as he fail to try to contact his principal and he sold the tomatoes. In Sarah’s case, it was straightforward that Ian must communicate with her before purchasing or selling any item for the art gallery according to her instructions. In duty of account, an agent must provide appropriate accounts when it is needed by the principal. Moreover, agents are not allowed to accept secret profits or take bribe in any kind of circumstances. In the case of Graham v Cummings 1904, the shareholder secretly negotiated in order to obtain a higher amount for his stock than other shareholders. The court held that an agent is not allowed to make secret profits without the consent from the principal in a business agency. Other than submitting relevant accounts when needed by the principal and not to create secret profit, an agent is also requires to pay sums received for the principal to the principal. Other duties of agent involved are not to disclose confidential information and not to delegate. When Sarah appointed Ian as her assistant to take care of the art gallery, he is not allowed to delegate the duty to others as the express authority was given to him only. Therefore, it is essential for Ian to perform his duty with diligence as a breach of duty will cause him to be liable for the damages. When an agent owes duties to the principal, in return the principal also owes a few duties to the agent. First of all, the principal must pay commissions as agreed to the agent. The agent has the right to receive it if he has done the job according to the terms in the agency agreement. For example in the case of Miller v Beale (1879), an auctioneer was employed to sell property and he has the right to receive his commissions. However, if the agent breach his duty to the principal, the principal may refuse to pay the agent. Marsh v Jelf (1862), a principal employed an auctioneer to sell property but the auctioneer sold it privately without the principal’s knowledge. It was held that the auctioneer has breached his duty to the principal and therefore commission was not entitled for him. Therefore it is the duty of Sarah to pay Ian if he has completed the job scope according to her instructions. Furthermore, the principal is not allowed to prevent the agent from obtaining his commission. Even if the transaction fallen through no fault of the agent, the agent still has the right to earn his commission. In the case of Alpha Trading v Dunnshaw Pattern (1981), an agent was in charge of making a contract for sale of cement between the seller and third party. However the seller failed to deliver and caused a breach to the contract of sale. Then, the commission was never received by the agent. It was held that the principal was liable to pay the agent his commissions. All costs incurred in carrying out the agency relationship, the agent is able to claim from the principal. This was shown in the case of Adams v Morgan (1924) where the agent incurred super tax in his process to following the principal’s instructions. Therefore, indemnity was claimed from the principal. However this is only applicable when the agent has completed authorized transactions within authority delegated from the principal and not available when the loss is due to agent’s own negligence or insolvency. So, Sarah owes the duty to indemnify Ian for performance done in carrying out his authority. An agency can be terminated in an identical steps or methods as in discharging a contract. Mutual agreement from both parties in an agency can terminate the relation of principal and agent. However, in Sarah’s case, she is able to terminate the agency or discharge the contract of agency by breach. Contract of agency is said to be terminated based on actions of agent. This can be explain based on Ian’s actions during Sarah’s absence. (i)Ian sold an art work which Sarah was unable to sell for nine years with a discount of 20% Ian’s action to sell this art work may be reasonable as it has been kept in the art gallery for nine years and Sarah has always wanted to sell it but fail to do so. If the customer is willing to purchase that piece of art work, Ian must inform Sarah. In this situation, Ian’s duty was only to negotiate the information regarding the art work with the customer even though he has acted in good faith to sell the art work. As the art work was sold to the customer without the consent from Sarah, Ian has breached the duty to communicate with Sarah which he should have inform Sarah about it. Ian not only sold the art work without communicating with Sarah, he also gave a discount of 20% to the customer. Ian could have been right as he has performed an act of good faith which he sold the art work for the benefit of Sarah as the art work was already kept in the gallery for nine years, but he has breached the duty as an agent when he gave out a 20% discount. It was understood that in Sarah’s instructions included not to give any discounts on displayed items in the gallery. When Ian gave out the 20% discount, he has breached his duty to follow proper instructions given by Sarah to conduct business with third parties. Therefore in this incident, Ian has breach the duty of obedience which is to obey instructions given by Sarah and the duty to communicate Sarah before making any business transactions. (ii)Ian bought a copy of famous art work and sold it as an original piece to Jake In the incident, Ian did not make any effort to communicate with Sarah to verify the buying and selling of that piece of copy art work. Both transaction were done without the consent from Sarah. As the transaction between Ian and Jake was done without the Sarah’s knowledge, Ian will be liable for the consequences and damages as he has breached his duty as an agent to follow Sarah’s instruction. According to Section 168 of Contracts Act 1950, it is the right of principal to repudiate such transactions made by the agent without the consent from the principal. Therefore, Sarah has the right to repudiate transactions made by Ian in buying and selling the copy of the artwork and terminate the agency as Ian has breached his duty. Furthermore, purchasing a fake art work and selling it as an original piece is considered against the law. The punishment shall be determined if Sarah bring the case to the court. (iii)Ian sold an art work which was reserved for another customer and he will obtain 15% of resale of the reserve painting Once again here, Ian has breached the duty of agent as he did not make any effort to communicate with Sarah. Ian should have contacted Sarah to obtain the permission to sell art work then he would not have sold that piece of art work which was reserved for another customer. This is considered as breach of duty to follow principal’s instructions. This time Ian did not give any discount to Amelia, but Sarah found out that he would obtain a profit of 15% of the re sale. Ian is considered as a disloyal agent as he used the agency to make secret profits. Moreover, he has breached the duty of agent which is not to make secret profit according to Section 168. The contract of agency can be terminated as he has committed the breach of duty as an agent. Therefore, in this incident Ian has breached the duty to perform according to Sarah’s instructions and he also committed a breach when he made secret profits for himself using the agency. In general, the conditions of the agency contract between Sarah and Ian are agent must follow instructions given by the principal and communicate and verify with the principal before buying and selling art work for the art gallery. It was concluded that the agent has breached condition of an agency contract and the principal has the right to revoke the authority of agent and thereby end the contract of agency. So, Sarah can terminate the agency agreement with Ian. Remedy is the way which the injured party enforces a right or correct a loss. The nature of the breach will determine remedies available to the injured party. The main purpose of remedy is to allow the innocent party to receive monetary compensation. The remedies to Sarah on Ian disobeying instructions are as following: (i)Claim for damages for breach of contract Other than terminating the agreement of agency with Ian, Sarah may also claim damages or losses due to acts of Ian who breached the contract as he failed to perform his job according to Sarah’s specific instructions. Sarah can claim the losses where Ian offered 20% discount to customer. (ii)Recovery of all profit which made by Ian Sarah also has the right to claim the benefits that obtained by Ian when he dealt with third parties without her consent. It is stated in Section 168 of Contracts Act 1950 that the principal may repudiate the business transaction made by the agent on his own account without the consent from the principal. Furthermore, it is the right of principal to receive the benefits obtained by agent when the agent deals on his own account in the business of agency in Section 169 Contracts Act 1950. Example of cases is Kribbs v Jackson 1957 Pennsylvania Supreme Court case, the agent who is in charge of collecting rent on property owned by the principal has secretly concealed amount of rent collected as his secret profit. It was held that all profits made by the agent belong to the principal. (iii)Refusal to pay the agent commission or other remuneration During Sarah’s absence, Ian has conducted a few business transactions without the consent of Sarah. Ian has breach his duty and therefore Sarah has the right to refuse to pay Ian commission. Ian must also bear all costs incurred in dealing with third party and he is not entitled to claim from the principal. According to Section 171 Contracts Act 1950, an agent is not entitled to collect any remuneration from the principal if the agent is guilty of misconduct in the business of the agency In conclusion, Ian as the agent appointed specifically by Sarah has violated the restriction of authority given by Sarah and caused breach to the agreement of agency. Therefore, Sarah can make decision to terminate the agency contract and can even refuse to pay commission to Ian. Furthermore, Sarah shall bring cases to court for relevant punishment.
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