Agency Implied or Ratification

(a) Explain any four (4) duties of an agent towards his principal as provided under the Contracts Act, 1950. (8 marks)

(b) With reference to the Contracts Act, 1950, explain how the following contract of agency may arise:

(i) Implied agency and agency by holding out or estoppel; (3 marks)

(ii) By ratification. (3 marks)

(c) Mello is an entrepreneur who runs an investment consultancy firm. Recently, he came up with an idea of making money by taking deposit from investors and promising them lucrative returns. Mello did not have the requisite permit to conduct this type of business activity. Mello then recruited Ijan, as one of his agents, to help him carry out the business. For a while, their business activity runs smoothly. However, things changed when Mello failed to pay the investors their supposed profit and the investors filed police reports. Mello and Ijan were arrested and charged for “illegal deposit taking” activities. Upon conviction, they were each fined RM100,000. Ijan now wants to recover the losses he suffered in the venture since, according to Ijan, he was acting as Mello‟s agent and is entitled to be indemnified.

Advise Ijan whether he may be successful in his claim. (6 marks)

(MIA QE 2014/3 Q1, 20 marks)

(a) 4 duties of agent towards his principal are:

According to Contracts Act, 1950
S.164 follow and seek directive and instruction from Principal, if none, follow local practice or custom
S.165 skill and diligent of agent to carry out instruction from Principal
S.166 keep account for the Principal
S.167 communicate with Principal to get instruction

MIA model answer:

Duties of an agent towards his principal under the Contracts Act, 1950:

-  S. 164: Agent‟s duty in conducting principal‟s business; in accordance to the principal‟s directions or in the absence of such directions to conduct business in accordance with the custom which prevails in doing business of the same kind; 

-  S. 165: Skill and diligence required from agent; to conduct business with as much skill as is generally possessed by persons engaged in similar business, unless the principal has notice of his lack of skill; 

-  S. 166: An agent is bound to render proper accounts to his principal on demand; 

-  S. 167: It is an agent‟s duty to communicate with the principal and in cases of difficulty, to use all reasonable diligence in communicating with his principal;

-  S. 168: If an agent deals on his own account in the business of the agency, without first obtaining the consent of his principal, and acquainting him with all material circumstances which have come to his own knowledge on the subject, the principal may repudiate the transaction; if the case shows either that any material fact has been dishonestly concealed from him by the agent, or that the dealings of the agent have been disadvantageous to him. 
-  S. 169If an agent without the knowledge of his principal, deals in the business of the agency on his own account instead of on account of his principal, the principal is entitled to claim from the agent any benefit which may have resulted to him from the transaction. 

-  S. 170: An agent may retain, out of any sums received on account of the principal in the business of the agency, all monies due to himself in respect of advances made or expenses properly incurred by him in conducting such business, and also such remuneration as may be payable to him for acting as agent.

-  S. 171: It is an agent‟s duty to pay sums received for the principal subject to deductions of all monies due to himself as prescribed under Section 170. 

[- S. 172: When agent’s remuneration becomes due
- S. 173: Agent not entitled to remuneration for business misconducted
- S. 174: Agent’s lien on principal’s property]

(b) (i) Agency by Implied and Estoppel or Holding Out.

Implied Agency -
Agent’s authority may be expressed or implied
139. The authority of an agent may be expressed or implied.

Definitions of express and implied authority
140. An authority is said to be express when it is given by words spoken or written. An authority is said to be implied when it is to be inferred from the circumstances of the case; and things spoken or written, or the ordinary course of dealing, may be accounted circumstances of the case.

A owns a shop in Kajang, living himself in Kuala Lumpur, and visiting the shop occasionally. The shop is managed by B, and he is in the habit of ordering goods from C in the name of A for the purpose of the shop, and of paying for them out of A’s funds with A’s knowledge. B has an implied authority from A to order goods from C in the name of A for the purposes of the shop.

Agency by Estoppel or Holding Out -
Estoppel is a principle that applies especially to apparent authority. Where an individual knows or aught to know that either their benefit or someone else's detriment is being caused by the belief of an agency relationship, when in fact non exists, that relationship will be held to be constructively valid.

(ii) Agency by ratification - S.149 & 150.

Right of person as to acts done for him without his authority.
Effect of ratification
149. Where acts are done by one person on behalf of another but without his knowledge or authority, he may elect to ratify or to disown the acts. If he ratifies them, the same effects will follow as if they had been performed by his authority.

Ratification may be expressed or implied
150. Ratification may be expressed or may be implied in the conduct of the person on whose behalf the acts are done.

(a) A, without authority, buys goods for B. Afterwards B sells them to C on his own account; B’s conduct implies a ratification of the purchase made for him by A.

(b) A, without B’s authority, lends B’s money to C. Afterwards B accepts interest on the money from
C. B’s conduct implies a ratification of the loan.

(c) Indemnifying agent is governed by S.175 to 178, Contracts Act 1950.

Principal’s duty to Agent
175. Agent to be indemnified against consequences of lawful acts
176. Agent to be indemnified against consequences of acts done in good faith
177. Non-liability of employer of agent to do a criminal act
178. Compensation to agent for injury caused by principal’s neglect

Mello and Ijan are in agency relationship. However, Ijan being Mello's agent acted in unlawful activities which falls under S.177 - non-liability of employer of agent to do a criminal act.

Both Mello and Ijan are caught and each are considered wrong in the eye of law, collectively and separately. Hence, Ijan cannot recover his losses in this venture with Mello because it is unlawful.

Similar case on Principal's indemnity to Agent who has engaged in unlawful act:

MIA QE 2011/3 Q4 - Raz and Bakar.

MIA QE 2012/9 Q2 - Bob and Steve.
MIA QE 2013/3 Q2 - Man and Parjo.
MIA QE 2014/3 Q1 - Mello and Ijan.
MIA QE 2014/9 Q2 - Messa and Jojo (more complicated)
MIA QE 2016/3 Q2 - Prinse and Ejan


S.164 - 178 Contracts Act, 1950.