4.3 Formation of Agency

 In agency, there are in effect two contracts: a) The first contract made between the principal and the agent which the agent derives his authority to act and on behalf of the principal; and b) The second contract made between the principal and the third party through the work of the agent.

Who can become a principal?

A person who is:  S136 CA 1950 – any person who is 18 years old and above and who is of sound of mind.

Who can become an agent?

A person who is:  S137 CA 1950 – an agent need to be a major or sound mind.

 If he/she is a minor or unsound mind, he/she would not be liable towards his/her principal for acts done as agent.

4.3 FORMATION OF AGENCY

 Like any other contract, a contract of agency can be expressed or implied from the circumstances and the conduct of the parties. In other words, the authority of an agent may be expressed (i.e. given by words spoken or written) or implied (i.e. inferred from things spoken or written or from the ordinary course of dealings).  Section 130 Contract Act 1950 states ‘no consideration is necessary in order to form a contract of agency’.  Generally, an agency may arise in the following ways: o By express appointment by the principal o By implied appointment by the principal o Ratification by the principal o By necessity o By the doctrine of estoppel

4.3.1 By Express Appointment by the Principal

 An agent may be appointed expressly either in written or oral form.  According to Section 140 Contract Act 1950, an authority is said to be express when it is given by words spoken or written. The provision also states that,

‘even a letter or written words spoken may be effective in appointing an agent ‘.

 Example: Ali said “Abu, I want you to be my agent”.

Garnac Grain Co. Inc v HMF Faure & Fairclough Ltd

Facts: Express appointment may be in a written or oral form.

4.3.2 By Implied Appointment by the Principal

 Actual implied authority is by way of the implied consent of the principal and the agent. This derived from the words and conduct of the parties in the way they have acted in connection to one another.  Section 140 Contract Act 1950 infer the creation of an agency by implication when a person ‘by his words or conduct holds another person as having authority to act for him’.  This appointment happens under three situations; i. When a person by his words or conduct holds out another person as having authority to act for him.  E.g.: Ali lives in Shah Alam and owns a shop in Tanjung Malim. The shop is managed by Siti who normally orders goods from Abu in Ali’s name for the purpose of the shop. Siti then pays the goods out of Ali’s fund. Now, as impliedly Siti become Ali’s agent.

ii. Relationship between husband and wife  It is implied that the wife has authority to pledge the husband’s credit in a contracts that are necessaries and suited to their condition and style of living.  The husband as the principal, is liable upon such contracts that are necessaries and suited to their condition and style of living.  However, the husband can rebut by proving that:  husband expressly forbade wife to pledge credit;  husband expressly warned tradesman not to supply wife with goods or credit;  wife was sufficiently provided for with goods;  wife given sufficient allowance;  the order for necessaries was unreasonable because of husband’s income

iii. Relationship between partners  Section 7 Partnership Act 1961 – each partner in a partnership is an agent to the firm or other partners in the firm, when contracting the course of the partnership’s business.

 Each partner become implied agent to the firm. On another hand, the firm or other partners are the implied principal to any one of the partners.  The firm or the other partners are liable to whatever contract which has been entered into by any of the partners.

Chan Yin Tee v William Jacks & Co.

Facts: The appellant and Yong, a minor were registered as partners. At a meeting with representative of the respondent company, the appellant held himself out to be Yong’s partner. Goods were supplied to Yong but not paid for. The respondent company obtained judgement against the appellant and Yong. The appellant appealed to the Federal Court.

Held: The court held that since the appellant had held Yong out as his agent who had the authority to do things on his behalf, the appellant was liable for Yong’s acts.

4.3.3 By Ratification

 Agency by ratification can take in either of these two situations: i. An agent who was duly appointed has exceeded his authority, or ii. A person who has no authority to act for the principal has acted as if he has the authority  When any one of the above-mentioned situations arise, the principal can either reject the contract or accept the contract so made – Section 149

Contracts Act 1950.  When the principal accepts and confirms such a contract, the acceptance is called ‘ratification’. However, if the principal does not agree, no contract exists and the principal would not be liable upon the act done by the agent.  According to Section 150 Contracts Act 1950, ratification may be expressed or implied.  The effect of ratification is to render the contract as binding on the principal as if the agent had been properly authorized beforehand – Section 149

Contracts Act 1950.  Ratification is retrospective; it dates back to the time when the original contract was made by the agent and not from the date of the principal’s ratification.

Bolton Partners v Lambert (1889)

Facts: Bolton Partners owned a factory, which Lambert offered to buy. This offer was accepted by the Managing Director, though in fact he had no authority to do this. On 13th January, there was a disagreement, and Lambert withdrew his offer. On 17th January, Bolton Partners started proceedings for breach of contract. On 28th January, the BOD of Bolton Partners ratified the action of the Managing Director. Lambert argued that this ratification came too late.

Held: The Court of Appeal held that it had retrospectively validated the original contract, and that Lambert’s attempt to withdraw was therefore ineffective. Lambert has breached the contract when he attempts to withdrew the offer to buy the factory.

 The following nine conditions must be fulfilled in order for the creation of an agency by ratification to arise: i. The act or contract must be unauthorized. ii. The unauthorized act is lawful

iii. The agent must, at the time of the contract, expressly act as an agent for the principal. He must not allow the third party to think that he is the principal.

Brook v Hook

Held: The principal may not ratify a contract in which his signature had been forged by the unauthorized agent

Keighly Maxted & Co v Durant

Facts: An agent was authorized by the appellant (principal) to buy wheat at a certain price. The agent exceeded his authority & bought it at a higher price. However, the agent contracted in his own name.

Held: The appellant was not liable to Durrant (3rd party) because the appellant could not ratify the contract because the contract was made in the agent’s own name.

iv. The agent must have a principal, who is in actual existence or capable of being ascertained, when the contract is made.

v. The principal must have contractual capacity at the time when the contract is being made and at the time of ratification. vi. The principal must, at the time of ratification, have full knowledge of all material facts.

vii. The principal must ratify the whole act or contract. viii. Ratification must be made within a reasonable time

ix. The ratification must not injure a third party, i.e., it must not subject the third party to damages or terminate his right or interest under

Section 153 Contracts Act 1950.

Kelner v Baxter

Held: A contract to buy a hotel made by an agent on behalf of a company which was not registered/formed could not be ratified by the company, because the company (principal) did not exist at that time.

March v Joseph

Held: A principal had ratified a contract without the full knowledge of all material facts. The Court held that the principal was not bound to such contract

Metropolitan Asylum Board v Kingham & Sons

Held: The agent contracted to buy eggs without the authority. The principal tried to ratify the contract 1 week after it was made. The Court held that ratification was too late.

Example:

Mr. Malek appointed Hassan as his agent to buy a lorry for his business which does not exceed RM200,000. Later, Hassan went to Bob’s Motors Sdn Bhd and ordered a lorry costs of RM350,000. He told the salesman that he is buying the lorry on behalf of Mr. Malek. A day later, Bob’s Motor Sdn Bhd delivered the lorry to Mr. Malek. If Mr. Malek confirms and adopted the contract on that day, Hassan is said to be his agent through ratification.

4.3.4 By Necessity

 Under certain circumstances a person may become the agent of another without having been appointed as such.  An agent can be appointed during an emergency even in the very beginning the agent is not appointed by the principal to act on his behalf.  An agency by necessity may be created if the following three conditions are met: i. It is impossible for the agent to get the principal’s instruction – Section 142 Contracts Act 1950. ii. The agent’s action is in order to prevent loss to the principal. iii. The agent of necessity must have acted in good faith.

Example:

Mary is leading a group for XYZ Travel Agency when their bus is involved in an attempted hijacking. Several passengers are injured and emergency medical treatment is required. In this situation, Mary would have the authority to use local doctors to treat the injured passengers. Her actions would be binding XYZ Travel Agency even though she had no actual authority to act.

Great Northern Railway v Swaffield

Facts: D has put his horse on the P’s train to be sent to a destination which has been agreed by both parties. Upon arrivals at the destination, there was no one to take the horse. The station master didn’t know the D’s address and thus directed that horse to be put in stable. The railway company later claimed from the D for the charges of the stable.

Held: P has acted as an agent by necessity.

Springer v Great Western Railway Company

Facts: The agent (D) agreed to carry principal’s (P) tomatoes from Jersey to Covent Garden Market. Owing to bad weather, the ship arrived late at Weymouth. Some of the tomatoes were found to be bad. D decided to sell the tomatoes locally as they felt the tomatoes could not arrive Garden Market in a saleable condition. But D did not communicate with P.

Held: P was awarded with damages as D failed to communicate with P as he could have done so.