Commercial Agency Contracts in Malaysia

The law of agency in Malaysia is governed by Part X of the Contracts Act 1950 be it a commercial agency or any other type of agency. For the purposes of this Article, the legal position in Malaysia as discussed herein equally applies to commercial agency agreements. It is a statutory provision that is heavily influenced by the Indian Contracts Act 1872, which in itself is premised on English common law. It is to be read together with Part V of the Companies Act 2016 if the parties under the agency agreements involve a foreign company intending to carry on business in Malaysia.

S. 135 of the Contracts Act 1950 (“CA”) spells out who can be an agent, and the word “persons” under s. 135 apart from natural persons include a body of persons, corporate or unincorporated’[1]. Thus, corporations and partnerships can also be agents as would unincorporated joint ventures.

[1] s. 3 of the Interpretation Acts 1948 and 1967; Also see: ss. 136 and 137 CA.

Whether the relationship of agency exists depends not in the use of terminology but on the exact circumstances of the relationship between the principal and agent. The word 'agent' may be used in at least two other senses. First, the word is frequently used to describe the position of a person who is employed by another to perform duties often of a technical or professional nature which he discharges as the other's alter ego and not merely as an intermediary between the principal and the third party, e.g. a solicitor who may be his client's agent for the purpose of instituting or continuing legal proceedings on his behalf. Secondly, the word has often been used in business in a complementary and not a legal sense as in the case of the appointment of a 'sole selling agent', 'exclusive agent', or 'authorised agent'. The relation so established between the appointor and appointee is usually that of vendor and purchaser and no contractual relationship is established between the appointor of the agent and third parties by the sale of goods of the so called agent to those third parties.

Agency can be created in 2 ways, first, by way of contract, second, by way of legal application in Malaysia. Sometimes the agency also takes effect both by contract and by law. For example, receiver & manager. The agency relationship between the receiver & manager and the company is formed under contractual instrument i.e. the debenture. However, when the company is wound up, under the Companies Act, the receiver & manager then becomes the agent of the chargee.

Under the Contracts Act, “agent” is a person employed to do any act for another or represent another in dealings with third persons[2]. The person for whom such act is done, or who is so represented, is called the “principal”. Based on this definition, example of agents in Malaysia include but is not limited to brokers, real-estate agents, insurance agents, travel agents, lawyers etc. These are some examples where the agency relationship is created by way of contract.

On the other hand, the creation of agency by the other laws in Malaysia, comprises of the following examples:

• under s. 7 of the Partnership Act 1961, partners are each other’s agents when contracting in the course of the partnership business.
• bank as an agent of customers – the relationship between a banker and his customers are generally that of a debtor and a creditor or vice versa with duties and obligations imposed by common law thereby creating an agency relationship[3]. When a banker receives money from his customers as deposit, the banker is a debtor and his customers are creditors. On the other hand, where a banker advances money as a loan or other credit, or extends banking facilities to his customer, the bank is the creditor and the customer is the debtor. When a customer hires a safe deposit box in which he keeps his valuables, the bank is the customer’s agent.

• liquidator of a wound-up company. The law of agency applies with respect to the actions and decisions taken by the liquidator. This is supplemented by ss. 486 and 505 of the Companies Act 2016, read together with Companies (Winding Up) Rules 1972.

[2] S. 135 CA.

[3] Public Bank Bhd & Anor v. Exporaya Sdn Bhd [2013] 1 MLJ507 at 517 – 520.

Anyone can become a principal or agent as long as the person is of the age of majority (age 18 and above in Malaysia) and of sound mind[4], otherwise, that person is not liable towards their principal for acts done by them as “agent”.

An agency can be formed in many ways. The laws in Malaysia do not require that an agency or sub-agency agreement must be in writing. Hence, the appointment may either be expressed or implied depending on the circumstances[5]. Unlike normal contracts, no consideration is required to create an agency. Likewise, the scope of agent’s authority by the principal can be given either expressly i.e. by words spoken or written, or impliedly when it is inferred from the circumstances of the case. Things spoken or written, or in the ordinary course of dealing, conduct of the parties may be accounted for in the circumstances of the case[6].

Therefore, in a usual commercial agency agreement, parties are encouraged to record a clear and unambiguous terms of authority, otherwise the contra proferentum rule[7] will apply against the principal, depending on how the agent interprets or understands the authorities.

In so far as a foreign company is concerned, in order for a foreign company to carry on business in Malaysia, apart from registering the company under the Companies Act 2016 in Malaysia, it is also required to appoint a Malaysian resident as an agent under a memorandum of appointment or a power of attorney, coupled with a statement by the agent stating his consent on the appointment[8]. Such agent will be answerable for all acts, matters and things that are required to be done by the foreign company under Companies Act 2016, and be personally liable to all penalties imposed on the foreign company for any contravention of the Companies Act 2016 unless the agent satisfies the Court hearing the matter that the agent should not be held responsible.

Apart from the above, the existence of an agency relationship can be inferred having regard to the surrounding circumstances. This agency arises where one person has acted by allowing the agent to hold himself out as having authority, so as to lead another to believe that he had authorised a third person to act on his behalf, and that other in such belief, enters into transactions with third persons within the scope of his ostensible authority. The burden rests on the person dealing with the agent to establish real and ostensible authority and the conduct said to amount to holding out must be proved affirmatively[9].

An agency can also be formed by way of ratification[10]. It can arise in any one of the following situations:

• an agent who was duly appointed has exceeded his authority; or
• a person who has no authority to act for the principal has acted as if he has the authority.

When the principal accepts and confirms such a contract, the acceptance is called ratification. Ratification may be expressed or implied. Ratification is retrospective i.e. the agent being treated as having been authorised from the very beginning to act in the manner in which he did and not from the date of the principal’s ratification[11]. Under normal circumstances, a contract can be ratified in the following circumstances:

• the act must be authorised by the principal;
• the agent must, at the time of contract, expressly act as an agent for the principal i.e. he must not allow the third party to think that he is the principal.

In this case, the principal is bound by the act, whether it be for his detriment or his advantage, and whether it be founded on tort or on a contract, to the same effects as by, and with all the consequences which follow from the same act done by his previous authority. The agent must have a principal, who is in actual existence or capable of being ascertained, when a contract is made. No one can ratify a contract if he is not a party competent to a contract at the date of the contract. The principal must ratify the whole act or contract. The ratification must not injure the third party, i.e. it must not subject the third party to damages or terminate his right or interest.

[4] as provided for in ss. 136 and 137 CA.

[5] KGN Jaya Sdn Bhd v.v Pan Reliance Sdn Bhd [1996 1 MLJ 233 at 237.

[6] s. 140 CA.

[7] Where there is ambiguity in a contract terms or clause, the ambiguous contract term may be interpreted by the Courts against the person who drafted / tendered the document to the other contracting party, applying an interpretation of the contract term which is most favourable to the other party.

[8] s. 562 and s. 563 of the Companies Act 2016.

[9] Cheng Hang Guan & Ors v. Perumahan Farlim (Penang) Sdn Bhd & Ors [1993] 3 MLJ 352 at 400.

[10] s. 149 CA. The principal may elect to ratify or disown the acts done by another person without the principal’s knowledge or authority.

[11] Raju Rajaram Pillai (T/A Dhanveer Enterprise) v. MMC Power Sdn Bhd & Anor [2000] 6 MLJ 551 at 574.

It is established law in Malaysia that where a contract has foreign elements involved, such contact is an international one, and if the parties expressly choose the law of the contract, that choice will be given effect. There is no restriction on the parties’ ability to choose the applicable law, the seat of the dispute, the applicable rules, the applicable court, or the language of the contract and procedure. Of course, these choices must not infringe any other law or public policy in Malaysia. For example, an agency on wager is likely to be struck down to be against public policy in Malaysia.

Therefore, parties are advised to establish a proper choice of law when entering into any agency agreement. It is the proper law that determines the essential validity of a contract involving foreign elements. It must be noted that a choice of law clause cannot remove the Court’s jurisdiction, and this means that a local Malaysian Court can listen to a case once it is established that they have such jurisdiction to decide the matter even if the contract says that the law of choice (example Law of Singapore) is to be used.

In the absence of an express choice, the court will have to find next if there is an implied choice under the law to which the contract / agreement was made. Such implied choice is usually to be inferred from the terms or form of agreement or surrounding circumstances. In a Malaysia High Court case[12], the Judge sets out the following factors for consideration:

• presence of a choice of forum clause;
• the use of terminology or concept peculiar to a system of law;
• where one party to a contract is a government;
• both sides carry on business or live in the same country.

Of course, none of the above factors is conclusive. A combination of factors may strengthen a finding of implied choice. In any event, if an implied choice is not so found, then the court adopts the system of law with which the transaction has the closest and most real connection. Such as:

• the place of performance of the contract;
• the place where the contract was made;
• the links of the parties of the contract to any particular country;
• the site of immovable property if such property is involved;
• the currency in which money under the contract is expressed.

[12] James Capel (Far East) Ltd v. YK Fung Securities Sdn Bhd (Tan Koon Swan, Third Party) [1996] 2 MLJ 97 at 110.

Possible, provided the agency agreement has expressly provided for it. There is no restriction on parties’ ability to choose the applicable law, the seat of the dispute, the applicable rules, the applicable court, or the language of the contract and the arbitration or normal court procedure. This in effect allows parties to bring the domestic disputes regime closer to the international regime.

Ss. 154 to 163 CA deal with the manner in which an agency may be terminated. An agency can be terminated in the same way a normal contract is terminated. Mutual agreement from both parties in an agency can terminate the relationship of principal and agent. The principal may revoke the authority of the agent at any time before it has been exercised to bind the principal. Another way of termination is by way of breach pursuant to a termination clause in the agreement.

Reasonable notice has to be given by the party who intends to terminate the agency. The notice is important as the termination of agency only takes effect after it becomes known to the agent and to any third person[13]. When the agency is for an indefinite period of time, the agent or the principal can terminate the agency by giving reasonable notice of termination to the principal or the agent[14].

In the case of an agent required to be appointed by a foreign company under the Companies Act 2016, once the agent is terminated or ceases to be the agent of the foreign company, there is an additional requirement for the foreign company to notify the Registrar of the companies of any changes within 14-days from the change[15].

Under the common law of agency, the actual authority of an agent, whether conferred by deed or not and whether expressed to be irrevocable or otherwise, is terminated by the death or mental incapacity of the principal or the agent, or when either party is a body corporation, by its winding up or dissolution.

[13] s. 161 CA.

[14] s. 159 CA.

[15] s. 563 of the Companies Act 2016.

Under the CA, an agent is entitled to be indemnified by the principal against all losses and liabilities incurred by him in the performance of his duty. However, if there is fraud, or the agent acts beyond his duty or is negligent, he is not entitled to be indemnified. Where the agent causes injury to the third party in execution of his duty while carrying out his duty in good faith, the principal is required to indemnify the agent against consequences of the act. Further, the principal must reimburse the agent of any legitimate expenses[16]. In the event the termination is unlawful and one party is entitled to claim for an indemnity, it does not prevent that person from claiming damages due to unlawful termination. Notwithstanding that, the principal is not liable to indemnify the agent against the criminal act done by the agent[17]. If the agent has acted without actual authority, but the principal is nevertheless to be held responsible for the act because the agent had authority, the agent is liable to indemnify the principal for any resulting loss and damage, and if any profits accrue, he must account for it[18]. 

[16] s. 175 CA.

[17] s. 177 CA.

[18] s. 164 CA.

It is also very common that transactions are carried out by the agent for an undisclosed principal[19]. Especially so when the non-Malaysian individual or company elects not to surface in any of the commercial contracts, instead it is to be carried out in Malaysia through an agent appointed in Malaysia. This is an important issue for a third party when contracting with the agent as it would affect whether the principal or the agent will be sued by the third party in the event of default. If the agent does not disclose the principal to the person whom the contract is entered into, the person has rights against the agent treating him as principal[20]. There is nothing stopping an agent contracting explicitly on someone else’s behalf without naming his principal. The third party may not be worried about who the principal is and if it does concern him, he can of course refuse to contract without identity of the principal being revealed. In the case of an undisclosed principal, he may sue or be sued on any contract made on his behalf, or in respect of money paid or received on his behalf by his agent acting within the scope of his actual authority.

Sub-Agent

Generally, an agent cannot, without any express / implied authority from his principal delegate, devolve upon another, obligations to the principal which he himself has undertaken to fulfil personally[21]. Once sub-agent is appointed, the agent is responsible to the principal for the acts of the sub-agents. “Sub-agent” is defined as a person employed by, and acting under the control of the original agent in the business of the agency[22]. Because of the feature under the Contracts Act, the sub-agent does not create any privity of contract between the sub-agent and the principal. It does not convert the sub-agent into a substituted agent of the principal[23].

[19] presumption of contract under ss. 183 to 186 CA; Anvest Corp Sdn Bhd v. Wong Siew Choong Sdn Bhd [1998] 2 MLJ 30 at 42 – 43

[20] s. 184 CA.

[21] s. 143 CA

[22] s. 144 CA.

[23] s. 147 CA.