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Introduction

A contract is a legally enforceable promise or set of promises 1. However, not


all promises are contracts.
Law
There 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. 2
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
another3. 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.4
1 Metzger, D.B. (1980/1983). Law for Business. Indiana University: Richard D. Irwan, INC,
pg 73
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
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
distress5.

Presumption of domination may be established in the following

circumstances, which is holding a real or apparent authority. It is related to the


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

relation that exists between father and sons, husband and wife, elder brother/sister to
the younger.
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 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.
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 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.
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 Caplan8, in relation to the original charge
covering a home loan and guaranteeing a loan to one of Mr. Caplans companies, the
6 [1894] 2 SSLR 57
7 [1983] 2 MLJ 196

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.
Nevertheless, the bank had later obtained Mrs. Caplans signature to a sideletter 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 Thomas9, the plaintiff bought a house with his greatnephew 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.
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

8 [1998] FLR 532


9 [1994] 1 WLR 129 (CA)

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 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.
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
10 Anderson, R.A. (1983). Business Law 8th Edition, America : South-Western Publishing Co. , pg 649

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 Stephanus11, 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.
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
11 64 Wn.2d 607, 393 P.2d 281 [1964]

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 Pulley12, 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.
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 3 rd 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
12 111 S.E. 2d 287 [1959] 201 Va. 398

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.13
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. 14
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. Chong15, the defendant was the managing director of house agency company.
The plaintiff has bought a flat from that company. The plaintiff later authorized the
13 Anderson, R.A. (1983). Business Law 8th Edition, America : South-Western Publishing Co. , pg 651
14 Anderson, R.A. (1983). Business Law 8th Edition, America : South-Western Publishing Co. , pg 652

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.

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.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

15 [1974] 2 MLJ 188


16 [1903] 2 KB 635

Fishing and Ice Co. v. Ansel17l, 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.
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
Society18, 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.
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.

17 [1888] 39 Ch D 339
18 [1978] 1 MLJ 149

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 299
SESSION 1 2014/2015
PREPARED BY :
NO.
1
2
3
4

NAME
MUHAMMAD AFIF FIRDAUS BIN MAT SHAM
FARITH AZIZI BIN MOHAYYADDIN ABDUL KADER
AMIRA SYAHIRA BINTI MOHD YAZID
SITI SHAHIRAH BINTI JAILANI
PREPARED FOR :
PUAN NORINTAN BINTI WAHAB
MARKS :

Reference

UiTM NO.
2012744537
2012372875
2012937161
2012743963

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