Bribery and the Contract Act 1950

As an agent to his principal, he is responsible not to make any secret profit out of the performance of his duty. Secret profit can be defined as a bribe such as payment of a secret commission or a kick back. According to Mr. Justice Slade in Industries and General Mortgage Co. v. Lewis [1949] 2 ALL ER 573 at 575, for the purpose of the civil law, a bribe means the payment of a secret commission from the person making the payment to the agent which he is dealing with. After that he fails to disclose to the other person with whom he is dealing that he has made the payment to the person whom he knows to be the other person’s agent. Besides that, secret profit also refers to any financial benefit which an agent receives over and above the commission or other remuneration agreed by the principal and agent.

Once it is established that an agent received a secret profit, the law presumes that he has been affected by the payment to the detriment of his principal. It does not have the necessity to prove dishonest motive or improper use of position of the agent. If the principal knows of the extra profit and consents to it, the agent is entitled to keep the profit. Now the profit is no longer secret. If however the profits are secret, then the following remedies are available to the principal.

Firstly, the principal may repudiate the contract, particularly if he feels that it is disadvantageous to him. With reference to S168 Contract Act 1950, if an agent deals on his own account in the business of the agency, without first getting the agreement of his principal and make known to him with all material circumstances which have come to his knowledge on the subject, the principal may repudiate the transaction. It has to be provided with the case which shows either any material facts has been dishonestly concealed from him by the agent, or that the dealings of the agent have been disadvantageous to him. For example, Ahmad directs Bane to sell Ahmad’s 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 can show that Bane has dishonestly concealed any material fact, or that the sale has been disadvantageous to him.

Secondly, the principal may recover the amount of the bribe from the agent. According to S169 Contract Act 1950, 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 knowledge of his principal, the principal is entitled to claim from the agent any benefit which may have resulted 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 bought. However he buys the house for himself. After that Anthony discovers that Brian has bought the house, he compels him to sell it to Anthony at the price he gave for it.

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 by the agent to another person. It matters not that the agent has not taken the profit himself. In the case of Tan Kiong Hwa v. Andrew S.H. Chong [1974] 2 MLJ 188, the plaintiff bought a flat from a company of which the defendant was the managing director. The plaintiff later authorized the defendant as his agent to sell the flat for $45,000. However the defendant sold the flat for $54,000. The difference of $9,000 was credited to the company. The company went into liquidation. 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 S173 Contract Act 1950, 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 RM2,000 to X.

As in the case of Andrews v. Ramsay and Co [1903] 2 KB 635, 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 instructed the defendant to sell property and agreed to pay him 50 pounds as commission. 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 plaintiff’s consent. The plaintiff learnt that that the defendant had also received 20 pounds as commission from the purchaser. He sued to recover this 20 pounds and also the 50 pounds he had paid the defendant. It was 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. Ansell (1888) 39 Ch D 339, 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 bonuses 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 Ansell’s secret dealing. At court, Ansell proved that he was competent however the court held that the dismissal was justified due to the secret dealing.

Last but not least, 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 Ltd [1978] 1 MLJ 149, 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 a bribe or secret commission from the vendor on account of the sale. 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.

However when the agency or the business of the agency no longer exists, the duty of informing to the principal for secret profits cease to apply. One of the examples is termination upon the outbreak of war as in the case of Nordisk Insulin-Laboratorium v. Bencard Klt [1953] 1 All ER 986. In that case, the defendants acted as agent for the plaintiffs. They import and sale the liquid insulin. But the agency was come to the end by the outbreak of war, and the property was vested in the Custodian of Enemy Property. The agent purchased insulin and re-sold it at a profit. The Court of Appeal held that at the time of the resale of the insulin, the agency has been terminated. The insulin was no longer belongs to plaintiffs. Consequently, the defendants in making the business of the insulin could not be regarded as the agent of the plaintiffs.