IntroductionA contract is a legally enforceable promise or set of promises[footnoteRef:1]. However, not all promises are contracts. [1: Metzger, D.B. (1980/1983). Law for Business. Indiana University: Richard D. Irwan, INC, pg 73]

LawThere are seven essential elements of a contract which is offer, acceptance, consideration, capacity, intention, certainty and free consent. A contract can be formed either verbally or in writing or implied from the conduct of the parties. Free consent is one of the essential elements in the formation of a valid contract. Without this, the agreement between them is not binding. Section 10(1) of the Contracts Act 1950 provides all agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void.[footnoteRef:2] [2: Services, I.L. (2004). Contracts Act 1950(Act 136), Contracts (Amendment) Act 1976 (A329) & Government Contracts Act 1949 (Act 120). Selangor : Member of the Malaysian Book Publishers Association, pg 5]

Coercion, undue influence, fraud, misrepresentation and mistake are the elements that may affect the free consent. Undue influence is designed to deal with contracts or gifts obtained without free consent by the influence of one mind over another[footnoteRef:3]. Under Section 16 (1), a contract is said to be induced by undue influence where the relation subsisting between the parties are such that of the parties is in position to the dominate the will of the other and uses that position to obtain an unfair advantages over the other.[footnoteRef:4] [3: Keenan, D. (1987). Business Law. Great Britain : Pitman Publishing, pg 127] [4: Services, I.L. (2004). Contracts Act 1950(Act 136), Contracts (Amendment) Act 1976 (A329) & Government Contracts Act 1949 (Act 120). Selangor : Member of the Malaysian Book Publishers Association, pg 6]

The basic idea behind undue influence is to protect the old, the timid, and the physically or mentally weak from those who gain their confident and attempt to take advantage of them. Victims of undue influence must have the mental capacity to contract but lack of the ability to adequately protect themselves against unscrupulous persons who gain their confident.

For example, Mary Jane, age 84 spent her last five years living with her daughter, Katy Johnson. Mary had been in poor health and was unable to care for herself. When Mary dead, her other heirs discovered that two weeks before her dead, Mary sold her house to Katy for $35,000. The market value of the house at the time of the sale was $60,000. The other heirs may attempt to have the sale set aside, arguing that it is the product of undue influence.

Katy will probably argue that Mary knew the true value of the house but sold it to her at the lower price as a reward for taking care of her for so many years. Whether this was, in fact, undue influence depends on Marys mental state, Katys behavior and Marys knowledge of the value of the property.There are two essential elements in order to claim that there is undue influence in a contract which is the domination of the will by one party over the other party and the dominating party obtains an unfair advantage in the contract.

In certain circumstances, a party is deemed by law, to be in a position that can dominate the will of another. The circumstances are provided under Section 16 (2) (a) and (b). According under Section 16 (2) (a), a person is deemed to be in a position to dominate the will of another where he holds a real or apparent authority over the other, or where he stands in a fiduciary relation to the other or under Section 16 (2) (b), where he makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age, illness, or mental or bodily distress[footnoteRef:5]. Presumption of domination may be established in the following circumstances, which is holding a real or apparent authority. It is related to the relation that exists between father and sons, husband and wife, elder brother/sister to the younger. [5: Services, I.L. (2004). Contracts Act 1950(Act 136), Contracts (Amendment) Act 1976 (A329) & Government Contracts Act 1949 (Act 120). Selangor : Member of the Malaysian Book Publishers Association, pg 7]

In illustration Section 16(a) , A having advanced money to his son, B, during his minority, upon Bs coming of age, obtains, by misuse of parental influence, a bond from B for a greater amount that the sum due in respect of the advance. A employs undue influence. In the case of Salwath Haneem v Hadjee Abdullah[footnoteRef:6], the plaintiffs husband made a conveyance of property belonging to himself and the plaintiff, to his brothers; B and C. The plaintiff initially agreed to the conveyance but after her husbands death, she brought an action seeking to set aside the agreement on the ground of undue influence. The court decided, a confidential relationship existed between the plaintiff and B & C. Therefore the burden of proof was on B & C to show that the plaintiff was fully understood the agreement and had agreed to the conveyance freely and without being subject to undue influence. Since both B & C failed to discharge the burden, the contract of conveyance was set aside. [6: [1894] 2 SSLR 57]

Next is standing is fiduciary relation. It is the relation that exists between the solicitor and client, doctor/nurse and patient and leader to his followers. In the case of Datuk Jaginder Singh v Tara Rajaratnam[footnoteRef:7], respondent, who was the owner of the land, claimed that she was induced by the fraud and undue influence of the appellant to transfer her land to the appellant. The court decided the appellant and the respondent were in a solicitor and client relationship. The transaction was unconscionable, and therefore, the burden was on the appellant to rebut the presumption of undue influence. Since the appellant had not discharged the burden, the contract of transferring the respondents land to the appellant was set aside. [7: [1983] 2 MLJ 196]

The effect of undue influence on a contract is to render it voidable rather than void. It follows that the victim must take steps to avoid the contract by rescinding it. However, in exceptional circumstances it may be possible to sever the objectionable parts of an instrument. In Barclays Bank v Caplan[footnoteRef:8], in relation to the original charge covering a home loan and guaranteeing a loan to one of Mr. Caplans companies, the bank had taken adequate steps to ensure the Mrs. Caplan received independent advice and accordingly was not fixed with constructive notice of any undue influence by her husband. [8: [1998] FLR 532]

Nevertheless, the bank had later obtained Mrs. Caplans signature to a side-letter extending the charges to cover guarantees of Mr. Caplans debts in respect of a further three companies of an unlimited amount. In relation to the side-letter the bank had failed to ensure that she received the necessary independent advice. The judge confirmed that only rarely would it be possible to sever objectionable parts of an instrument following a finding of undue influence since such a finding vitiated consent. On this fact, though, it was clear Mrs. Caplan had freely consented to the first guarantee she had not been properly advised in relation to the other guarantees.In the case of Cheese v Thomas[footnoteRef:9], the plaintiff bought a house with his great-nephew for $83000. The money for the purchase was raised by the plaintiff contributing $43000 and the defendant $40000 by way of a mortgage on the property for that amount. The house was purchased in the defendants name, though it was agreed that the plaintiff would have sole use of the house for the rest of his life. It was further agreed that on the plaintiffs death the house would belong to the defendant exclusively. Eventually, the plaintiff become worried that the defendant was not paying the mortgage repayment, conduct with inevitably would have placed his interest in the property at risk. The plaintiff thus sought to have the arrangement set aside on the basis of undue influence. [9: [1994] 1 WLR 129 (CA)]

The judge at first instance ruled the agreement could be set aside for undue influence. Normally, where restitution is ordered, the plaintiff should have been able to recover his full $43000 contributions since the principle behind this remedy is that the parties should be restored to their original position.

Conclusion

In conclusion, contract will complete if there is a element of free consent which done by undue influence, if not, contract is invalid.

Issue

Whether there is a breach of duties by the agent when agent takes a secret profit?

Law

Agency is a relation based upon an express or implied agreement by which one person, the agent, is authorized to act under the control of and for another, the principal, in negotiating and making contracts with third persons[footnoteRef:10]. Under Section 135, an agent is a person employed to do any act for another or to represent another in dealings with the third person and the person whom such act is done, or who is so represented, is called the principal. [10: Anderson, R.A. (1983). Business Law 8th Edition, America : South-Western Publishing Co. , pg 649]

There a five formation of agency which is by express appointment, by implied appointment, ratification, necessity /emergency and agency by estoppel. There are two duties of agency which is agents towards principal and principal towards an agent.The duty of an agent towards principal is to be loyal. An agent must be loyal or faithful to the principal. The agent must not obtained any secret profit or benefit from the agency. If the principal is seeking to buy or rent property, the agent cannot secretly obtained the property and then sell or lease it to the principal at a profit. Section 168 states that an agent who owns property cannot sell it to the principal without disclosing that ownership to the principal. If this is not done, the principal may avoid the contract even though the agent conduct did not cause the principal any financial lost or the principal can approve the transaction and sue the agent for any secret profit obtained by the agent.

An agent must not accept secret gifts or commission from third person in connection with the agency. If the agent does so, the principal may sue the agent for those gift and commission. An agent is, of course, prohibited from aiding the competitors of a principal or disclosing to them information relating to the business of the principal. It is also a breach of duties for the agent knowingly to deceive the principal. In the case of Rushing v Stephanus[footnoteRef:11], the court said, The broker must fully reveal the nature and extent of his fees to the client for whom he acts and failure to do so will render him liable. It held because of his deliberate breach of his duties of loyalty, Stephanus was entitled to no compensation even for properly performed services. [11: 64 Wn.2d 607, 393 P.2d 281 [1964]]

Next is obedience and performance. Under Section 164, an agent is under a duty to obey all lawful instruction. The agent is required to perform the services specified for the period and in the way specified. An agent who does not is liable to the principal for any harm caused.

For example if an agent is instructed to the cash payment only but accepts a cheque in payment, the agent is liable for the loss caused the principal when the cheque is dishonored by non-payment. Likewise, when an insurance broker undertakes to obtain the policy of insurance for a principal that will provide a specified coverage but fails to obtained a policy with the proper coverage, the broker, as agent of the principal, is liable to the principal for the loss thereby caused.

If the agent violates instructions, it is immaturely that the agent acted in good faith or intended to benefit the principal. It is the fact that the agent violated the instructions and thereby caused the principal loss which imposes a liability on the agent. In determining whether the agent has obeyed instructions, they must be interpreted in a way that a reasonable person would interpret them.

Then, duty to exercise care and skill. Section 165 states the agent has the duty to act with ordinary care and with the skill common in the community for the kind of work he or she is employed to do. There is a trend, which is likely to continue, to shift from a local to a national standard of skill for professionals. This is because of the widespread availability of continuing education and training programs as well as specialized informative journals for physicians, lawyers, accountants and other professional agent. An agent is bound by any representation he or she makes as to skill. Also, an agent may warrant results, guaranteeing satisfaction or successful result.

For example, an art broker might guarantee that the painting he buys for you will double in value within two years. In the absence of such a warranty, the agent does not assume the risk of success or satisfaction which his or her performance.

The next duty is an agent must account to the principal for all property or money belonging to the principal that comes into the agents possessions. Section 166 states the agent should, within a reasonable time, give notice of collections made and render an accurate account of all receipts and expenditures. The agency agreement may state at what intervals or on what dates such accountings are to be made. In the case of Bain v Pulley[footnoteRef:12], the court said that, in an action for an accounting, the agent has the burden of proving that he or she has pad the principal or otherwise properly disposed of whatever is due the principal. The annual income report was not an accounting. There had been no reconciliation of the income and expense items with the amount of cash in the bank or with the records of the estate. Nor had there been any agreement by the trustees or beneficiaries that the annual income reports were final accountings. [12: 111 S.E. 2d 287 [1959] 201 Va. 398]

Next is it is the duty of an agent to keep the principal informed of all facts relating to the agency which are relevant to protecting the principals interests. In consequences, the principals promise to pay a bonus to an agent for information secured by the agent in the course of duty is not enforceable because the principal was entitled to that information anyway. The promise of the principal is unenforceable because it is not supported by considerations.

Then, cannot make any secret profit. It is when any kind of monetary benefits or profits which are received by the agent from 3rd party without the knowledge of the principal. There are few remedies available for the principal if the principal does not consent about it. Firstly, the principal may repudiate the contract, particularly if he feels that it is disadvantageous to him. With reference to Section 168 Contract Act 1950, if an agent deals on his own account in the business of the agency, without first getting the agreement from his principal and acknowledge him with all significant circumstances which have come to his knowledge on the subject, the principal may repudiate the transaction. Principal need to show either any material facts have been dishonestly hidden from him by the agent, or that the dealings of the agent have bring unfavorable condition to him.

For example, Ahmad directs Bane to sell Ahmads estate. Bane buys the estate for himself in the name of Celan. Ahmad may repudiate the sale when he discovered that Bane has bought the estate for himself, provided if he show that Bane has dishonestly concealed any material fact, or the sale has been disadvantageous to him.[footnoteRef:13] [13: Anderson, R.A. (1983). Business Law 8th Edition, America : South-Western Publishing Co. , pg 651]

Secondly, the principal may recover the amount of the bribe from the agent. According to Section 169, if an agent deals in the business of the agency on his own account instead of on account of his principal and at the same time without the awareness of his principal, the principal is entitled to claim from the agent any benefit which may have belong to him from the transaction.

For example, Anthony is the principal of Brian. He directs Brian to buy a certain house for him. Brian tells Anthony that the house cannot be sold to him. However Brian buys the house for himself. After that Anthony discovers that Brian has bought the house, he forces him to sell it to Anthony at the price he gave for it.[footnoteRef:14] [14: Anderson, R.A. (1983). Business Law 8th Edition, America : South-Western Publishing Co. , pg 652]

The principal has the right to recover the bribe or secret profit not only to the extent where in a transaction an agent sells at a price higher than was set by him, it also includes secret profit passed on to another person by agent. It matters not that the agent has not taken the profit himself. In the case of Tan Kiong Hwa v. Andrew S.H. Chong[footnoteRef:15], the defendant was the managing director of house agency company. The plaintiff has bought a flat from that company. The plaintiff later authorized the defendant as his agent to sell the flat for $45,000. However the defendant sold the flat for higher price, which is $54,000. The difference of $9,000 was credited to the company. The court held that the plaintiff was entitled to recover $9,000 from the defendant as the defendant had breached his duty as an agent. [15: [1974] 2 MLJ 188]

Thirdly, the principal may refuse to pay the agent his commission or other remuneration. In connection with Section 173, an agent who is guilty of bad controlling in the business of the agency is not entitled to any remuneration in respect of that part of the business which he has misconducted.

For example, X employs Y to recover RM50,000 from Z, and to invest it on good security. Y discovers the RM50,000 but invest only RM40,000 on good security. He invest the remaining RM10,000 on security which he ought to have known to be bad. This results X loses RM2,000. Thus Y is entitled to remuneration for recovering the RM50,000 and for investing the RM40,000. He is not entitled to any remuneration for investing the RM10,000 and he must make good the RM 2,000 to X.

As in the case of Andrews v. Ramsay and Co.[footnoteRef:16] , where the principal successfully recovered both the commission paid to the agent plus the secret commission received by his agent from a third party. In that case, the plaintiff directed the defendant to sell property and agreed to pay him commission of 50 pounds. The defendant received 100 pounds from a purchaser as deposit for the property. The defendant paid 50 pounds to the plaintiff and kept the other 50 pounds in payment of his commission with the plaintiffs knowledge. However the plaintiff learnt that the defendant had also received another 20 pounds as commission from the purchaser. He sued his agent to recover this 20 pounds and also the 50 pounds he had paid the defendant initially. The court held that he could recover both of them.

Besides that, if agent makes any secret profit out of the performance of his duty, the principal may dismiss the agent for breach of duty. In the case of Boston Deep Sea Fishing and Ice Co. v. Ansel[footnoteRef:17]l, Ansell was a director of BDSFI, employed on a fixed-term contract. He was also secretly a director of a boat-building company. He ordered many boats for BDSFI from his other company due to incentives he received on sales. Ansell was dismissed because he was found incompetent. He was being sued for wrongful dismissal. While preparing for their defence, Boston discovered Ansells secret dealing. At court, Ansell proved that he was competent however the court held that the dismissal was justified due to the secret dealing. [16: [1903] 2 KB 635] [17: [1888] 39 Ch D 339]

Next, the principal may sue the agent and the third party giving the bribe for damages for any loss he may have sustained through entering into the contract. As in the case of Mahesan v. Malaysian Govt. Officers Co-operative Housing Society[footnoteRef:18], the appellant was a director and secretary of the respondent co-operative society. He brought land at a price of $944,000 from the vendor who had earlier paid $456,000 for it. The appellant knew of this fact however he failed to inform the society. The society discovered the fact only after the sale was done and discovered the appellant had received $122,000 as secret commission from the vendor. As a result, the Privy Council held that the respondent could recover either bribe or the amount of the actual loss suffered by it as a consequence of entering into the contract. [18: [1978] 1 MLJ 149]

Applications

In the present case, Jay Hart have received RM 10,000 of secret profit because success in persuading Mr. Tar Nah to reduce the price of land from RM 500,000 to RM 470,000.Based on the case of Tan Kiong Hwa v. Andrew S.H. Chong, plaintiff ordered defendant to resell the house at the price of RM 45,000 but he managed to sell at RM 54,000. The extra of RM 9,000 was credited into companys account. The court decided, the plaintiff was entitled to claim the money from defendant.So, Mr. Tar Nah entitled to claim the RM 10,000 from Jay Hart because he has breached the duty of an agent. Mr. Tar Nah also may terminate the contract between him and his agent.

Conclusion

If agent has made a secret profit, principal may recover that profit from the agent because it was done without knowledge of principal and it breach the duty of agent towards principal.

GROUP ASSIGNMENT LAW 299SESSION 1 2014/2015

PREPARED BY :NO.NAMEUiTM NO.

1MUHAMMAD AFIF FIRDAUS BIN MAT SHAM2012744537

2FARITH AZIZI BIN MOHAYYADDIN ABDUL KADER2012372875

3AMIRA SYAHIRA BINTI MOHD YAZID2012937161

4SITI SHAHIRAH BINTI JAILANI2012743963

PREPARED FOR :PUAN NORINTAN BINTI WAHAB

MARKS :

Reference

1.Anderson, R.A. (1983). Business Law 8th Edition, America : South-Western Publishing Co.

2.Metzger, D.B. (1980/1983). Law for Business. Indiana University: Richard D. Irwan, INC.

3.Poole, J. (2003). Casebook On Contract Law. United States: Oxford University Press

4. Richards, P. (1995). Law of Contracts Second Edition, London: Pitman Publishing

5.Townsley, F.W. (1987). Business Law, Great Britain: Pitman Publishing

6. Services, I.L. (2004). Contracts Act 1950(Act 136), Contracts (Amendment) Act 1976 (A329) & Government Contracts Act 1949 (Act 120). Selangor : Member of the Malaysian Book Publishers Association

1. Discuss what is meant by undue influence and state the effects on a contract.

2. Mr. Tar Nah entered into an agency contract with Jay Hart to get a buyer for a piece of land near Muar for RM 500,000. Unknown to Mr. Tar Nah, Jay Hart also received a personal commission from the buyer of the land for RM 10,000 if he managed to persuade Mr. Tar Nah to reduce the price of land to RM 470,000. After due consideration, Mr. Tar Nah agreed to sell the land for RM 470,000. After a few months, Mr. Tar Nah found out about the personal commission obtained by Jay Hart. Advice Mr. Tar Nah as to his rights arising from the incident