Q.
(a) Citing relevant statutory provisions, explain the creation of agency by:
(i) Ratification; (4 marks)
(ii) Necessity. (4 marks)
(b) In relation to agency, explain the difference between actual authority and ostensible authority. (3 marks)
(c) State any two (2) of the exceptions to the general rule, that an agent cannot delegate the authority given to him by his principal. (2 marks)
(d) Aji acts on behalf of Pian in purchasing raw materials for Pian’s construction business. Most of the purchases were made in cash. The usual practice is that, Aji will be given an amount of cash to make a specific purchase on behalf of Pian. On this particular incident, Aji was assigned to purchase a hundred (100) bags of cement. The price of cement was controlled by the government at RM30 per bag. Aji however, managed to make an arrangement with a supplier who agrees to sell the item for RM20 per bag. As such, Aji managed to purchase the cement at a total price of RM2,000 instead of RM3,000. Aji decided not to tell Pian about the actual purchase price with the intention to keep the balance of RM1,000 for himself.
Under the law, Aji is not entitled to keep the RM1,000. Explain why this is so, in relation to the law of agency. (7 marks)
(a)
(i) Ratification - S.149, more readings refer to:
2014 MIA QE Q1
2013/9 MIA QE Q2
Ratification in Contract Act 1950
(ii) Necessity - S.142, more readings refer to:
2011/9 MIA QE Q3
MIA QE 2015/3 Q2
(b) Actual vs Ostensible Authority
Actual vs Apparent Authority
2015/3 Q2 Agency Actual Apparent or Ostensible Authority
(c) Agency cannot delegate, S.143.
2014/9 MIA QE Q2
5 Exceptions to Delegatus Non Potest Delegare
Agent's agent
(d) Aji and Pian - Secret Money.
S.168, Right of principal when agent deals, on his own account, in business of agency without principal's consent.
S.169 Principal's right to benefit gained by agent dealing on his own account in business of agency.
Ref:
Earlier posts.
MIA Model Answer
(a) Citing relevant statutory provisions, explain the creation of agency by:
(i) Ratification: Section 149, Contracts Act, 1950. An agency by ratification may be created by either an agent, who was duly appointed and has exceeded his authority, or a person who has no authority to act for the principal and has acted as if he has the authority. When either one of these happens, the principal can either reject or accept the contract so made. When the principal accepts and confirms the contract, it is ratification. Ratification may be express or implied. The effect of ratification is to render the contract binding on the principal as if the agent had been properly authorized beforehand. Ratification is retrospective in effect; it dates back to the time when the contract was made by the agent and not at the time when the ratification was made.
(ii) Necessity: Section 142, Contracts Act, 1950. (In an emergency) An agency by necessity may be created if the following conditions are satisfied:
- It must be impossible for the agent to get the principal’s instruction;
- The agent’s action is necessary under the circumstances, to prevent loss to the principal with respect to the interest committed to his charge;
- The agent has acted in good faith.
- An agency by necessity is created when someone is entrusted with another’s property and it becomes necessary to do something in order to preserve the property although he has no express authority to do so. There must be already, in existence, some contractual relationship between the principal and the person who acts on his behalf (owner and master of a ship, owner and carrier of goods).
(b) In relation to agency, explain the difference between actual authority and ostensible authority.
An agent’s authority may be actual or ostensible.
Actual authority is that which is expressly given by the principal to the agent, whether orally or in writing. It may also be implied from the express authority given, from the circumstances of the case, custom, or usage of trade, or the situation and conduct of the parties.
Ostensible (or apparent) authority is that which is not expressly given by the principal but which the law regards the agent as possessing, although the principal has not consented to his exercising such authority. Secret or private restrictions on the authority of the agent do not affect a third party who does not know of such restrictions and who has acted in good faith in relying on the agent’s ostensible authority.
(c) State any two (2) of the exceptions to the general rule, that an agent cannot delegate the authority given to him by his principal.
Any two (2) of the following:
(i) Where the principal approves of consents to the delegation of authority;
(ii) Where it is presumed from the conduct of the parties that the agent has the power to delegate his authority;
(iii) Where the custom or practice of the trade or business permits delegation;
(iv) Where the nature of the agency is such that delegation of authority to another person is necessary to complete the business;
(v) In case of necessity or an unforeseen emergency;
(vi) Where the act to be done is merely ministerial or clerical and does not involve the exercise of discretion.
(d) Aji acts on behalf of Pian in purchasing raw materials for Pian’s construction business. Most of the purchases were made in cash. The usual practice is that, Aji will be given an amount of cash to make a specific purchase on behalf of Pian. On this particular incident, Aji was assigned to purchase a hundred (100) bags of cement. The price of cement was controlled by the government at RM30 per bag. Aji however, managed to make an arrangement with a supplier who agrees to sell the item for RM20 per bag. As such, Aji managed to purchase the cement at a total price of RM2,000 instead of RM3,000. Aji decided not to tell Pian about the actual purchase price, with intention to keep the balance of RM1,000 for himself.
- Area of concern: Duties of agents towards principal.
- Specific duty in relation to the scenario: Not to make secret profit out of the performance of his duty.
- Law: Section 168, 169, - Contracts Act, 1950.
- Secret profit means a bribe or payment of a secret commission or any financial advantage which an agent receives over and above the commission or other remuneration agreed by the parties.
- In this situation, the RM1,000 that Aji gained may be regarded as secret profit, since it was acquired in the course of the performance of his duty as Pian’s agent.
- If Pian knows about the secret profit and consents to it, Aji is entitled to keep it, since it is no longer secret. [section 168, Contracts Act, 1950]
If the profits are secret, then Pian may do the following:
(ii) Recover the amount of secret profit from Aji – section 169, Contracts Act, 1950;
(iii) Refuse to pay Aji his commission or remuneration;
(iv) Dismiss the agent for breach of duty;
Therefore, as far as Aji is concerned, he is not entitled to keep the secret profit he made in the transaction, unless Pian knows about it and consents to it. Aji may be required to return the RM1,000 or may lose his entitlement to the remunerations payable to him as Pian’s agent, or be dismissed for breach of duty.