(a) With reference to statutory provisions, describe three (3) ways by which an agency may be created, other than by “express appointment”. (6 marks)
(b) In relation to an agency relationship, in a situation where an agent has acted outside his actual authority, explain the rights of the following categories of persons against the agent:
(i) Third person’s rights against the agent; (3 marks)
(ii) Principal’s rights against the agent. (3 marks)
(c) Prinse engaged Ejan to sell firecrackers on his behalf at a Ramadhan bazaar. The sale of firecrackers is prohibited under the law but Ejan agreed anyway, due to the lucrative commission offered by Prinse. Prinse also assured Ejan that he will indemnify any incidental costs or personal losses that Ejan may incur in carrying out the task. Ejan was arrested by the authorities for selling prohibited items and was fined RM5,000 for the offence. Ejan wants to know whether he may claim the indemnity promised by Prinse as his principal, with regards to his loss. Advise Ejan. (8 marks)
(a) The 3 ways are
1. Appointment by ratification (s.149)
2. Appointment by necessity (in an emergency by s.142)
3. Appointment by Estoppel (implied appointment by s.139 & s.140)
Refer to earlier posts below:
Agency appointment by ratification vs estoppel
Agency appointment of MIA QE 2013/9 Q2
Agency Creation and Termination MIA QE 2008/9 Q3
(b) Agent acted outside his authority
(i) 3rd person's right against the agent.
[This is a promise between the 3rd person and the agent personally. As the agent acted outside of his authority without notice to the 3rd person, the 3rd person can use the principle of estoppel against the principal. However, the question is about rights against the agent, not the principal.
On estoppel, the 3rd person could however, claim against the principal if he could prove that he does not aware the agent is acting out of authority. See here for CA50 S.190 on this provision.
See also postings on Estoppel below:
Agency appointment by ratification vs estoppel
Doctrine of Estoppel in Real Estate Agency Practice. 2015 Q7
Promissory Estoppel revisited 2014 Q8
Contract - Estoppel 2012 Q3
Assuming that the Principal repudiate the transaction, this leaves the agent and the 3rd person in desperation. So, if the damage is onto the 3rd person, the avenue to claim damage with the agent is based on the non-performance of the contract between the agent and the 3rd person.
For example, the agent has collected earnest deposit from the 3rd party buyer, he is to compensate the loss and pay for any financial charges incurred.
If the agent has never had an authority to act, and pretended to act as agent of his principal, he is said to have the liability of pretended agent.]
S.188 Liability of pretended agent.
A person untruly representing himself to be the authorized agent of another, and thereby inducing a third person to deal with him as such agent, is liable, if his alleged employer [in this case as not principal as there was never any appointment] does not ratify his acts [using S.149 appointment of agent by ratification], to make compensation to the other in respect of any loss or damage which he has incurred by so dealing.
[The third person, after having realized the agent is acting out of authority, does not need to perform the contract.
For example, when the 3rd person buyer got to know that the agent is not representing the house owner, he does not need to perform the agreement with the pretended agent. The 3rd person buyer need not carry on the promise (that he will buy the house from this alleged agent). This is spelled out in S.189 below.]
S.189 Person falsely contracting as agent not entitled to performance.
A person with whom a contract has been entered into in the character of agent is not entitled to require the performance of it if he was in reality acting, not as agent, but on his own account.
[x] emphasis mine.
(ii) Principal's right against the agent.
When agent acted outside of his authority - for example, incurred a loss to the principal (S.164), sold the house for a secret profit (S.169), the principal can repudiate the transaction (S.168) - meaning retract or refuse to agree to the transaction. Principal can claim from the agent any benefit which may have resulted to him from the transaction - S.169. On the other hand, if there is any loss sustained, he must make good to his principal (S.164).
S.169 Principal's right to benefit gained by agent dealing on his own account in business of agency.
If 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.
A directs B, his agent, to buy a certain house for him. B tells A it cannot be bought, and buys the house for himself. A may, on discovering that B has bought the house, compel him to sell it to A at the price he gave for it.
In Agent's duty to principal, S.164 mentions the following:
S.164 Agent's duty in conducting principal's business.
An agent is bound to conduct the business of his principal according to the directions given by the principal, or, in the absence of any such directions, according to the custom which prevails in doing business of the same kind at the place where the agent conducts the business. When the agent acts otherwise [outside his authority], if any loss be sustained, he must make it good to his principal, and, if any profit accrues, he must account for it.
[x] emphasis mine.
S. 168 Rights of principal when agent deals, on his own account, in business of agency without principal's consent.
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.
(a) A directs B to sell A's estate. B buys the estate for himself in the name of C. A, on discovering that B has bought the estate for himself, may repudiate the sale, if he can show that B has dishonestly concealed any material fact, or that the sale has been disadvantageous to him.
(b) A directs B to sell A's estate. B, on looking over the estate before selling it, finds a mine on the estate which is unknown to A. B informs A that he wishes to buy the estate for himself, but conceals the discovery of the mine. A allows B to buy, in ignorance of the existence of the mine. A, on discovering that B knew of the mine at the time he bought the estate, may either repudiate or adopt the sale at his option.
Furthermore, S.181 Principal not bound when excess of agent's authority is not separable.
Where an agent does more than he is authorized to do [outside his authority], and what he does beyond the scope of his authority cannot be separated from what is within it, the principal is not bound to recognize the transaction.
A authorizes B to buy 500 sheep for him. B buys 500 sheep and 200 lambs for one sum of RM6,000. A may repudiate the whole transaction.
[However, if it is separable, then the original scope is bound. This is specified in S.180.]
S.180 Principal how far bound when agent exceeds authority.
When an agent does more than he is authorized to do, and when the part of what he does, which is within his authority, can be separated from the part which is beyond his authority, so much only of what he does as is within his authority is binding as between him and his principal.
A, being owner of a ship and cargo, authorizes B to procure an insurance for RM4,000 on the ship. B procures a policy for RM4,000 on the ship, and another for the like sum on the cargo, A is bound to pay the premium for the policy on the ship, but not the premium for the policy on the cargo.
[x] Own account.
(c) Prinse engaged Ejan to sell firecrackers on his behalf at a Ramadhan bazaar - where selling firecrackers is illegal. This is agent acting in unlawful act.
Ejan wants to know whether he may claim the indemnity promised by Prinse as his principal, with regards to his loss - this is about Non-liability of employer of agent to do a criminal act.
S.177 Non-liability of employer of agent to do a criminal act.
Where one person employs another to do an act which is criminal, the employer is not liable to the agent, either upon an express or an implied promise, to indemnify him against the consequences of that act.
(a) A employs B to beat C, and agrees to indemnify him against all consequences of the act. B thereupon beats C, and has to pay damages to C for so doing. A is not liable to indemnify B for those damages.
(b) B, the proprietor of a newspaper, publishes, at A's request, a libel upon C in the paper, and A agrees to indemnify B against the consequences of the publication, and all costs and damages of any action in respect thereof. B is sued by C and has to pay damages, and also incurs expenses. A is not liable to B upon the indemnity.
Therefore, Prinse is not liable to indemnify Ejan for the selling of firecrackers - which is an unlawful act. Moreover, Ejan cannot claim against Prinse for indemnifying the RM5,000 fine he paid being caught for this offense.
MIA QE 2011/3 Q4 - Raz and Bakar.
(a) Agency may be created in the following ways:
1. By implied agreement between the parties (Section 141 (2) of the Contracts Act, 1950) whereby by words or conduct of the principal, an agent is appointed and he accepts the appointment;
2. By ratification. This is where the agent acts without authority or has exceeded his authority and the principal ratifies or adopts the transaction. Section 149, Contracts Act 1950;
3. By Neccesity. By virtue of section 142 of the Contracts Act, 1950 an agency may be deemed to arise in a situation of urgent necessity. It provides that: “An agent has authority, in an emergency, to do all such acts for the purpose of protecting his principal from loss as would be done by a person of ordinary prudence, in his own case, under similar circumstances.”
(b) (i) Third person’s rights against the agent:
Section 188 of the Contracts Act, 1950 provides that a person who held himself out as having authority when he did not have it, is liable to the third person for breach of warranty of authority if:
o The principal does not ratify the agent’s act; and
o The third person was induced by the agent’s representation to deal with him.
(ii) Principal’s rights against the agent:
Section 164 of the Contracts Act, 1950 provides that the agent is bound to comply with the instructions given. If the agent acts otherwise, he is liable to the principal for the loss suffered by the principal, and if any profit accrues, the agent must return it to the principal.
(d) This situation involves the principles of agency. When Prinse engages Ejan to do something, Prinse becomes the principal and Ejan is his agent. In the absence of an express contract, the employer of an agent is bound to indemnify the agent against the consequences of all lawful acts done by the agent in the exercise of the authority conferred upon him (Section 175 Contracts Act, 1950).
However, in this situation, the task with which Ejan was employed to do is an illegal activity. Selling firecrackers is prohibited by law. Therefore, by virtue of section 177, Contracts Act, 1950 where one person employs one person to do an act which is criminal (illegal), the employer is not liable to the agent, either upon an express or an implied promise, to indemnify him against the consequences of that act.
Ejan is advised that he cannot recover the RM5000 that he had paid for the fine.