Agency agreements form the backbone of countless business relationships in Malaysia. Whether you're appointing a sales agent, engaging a commercial representative, or establishing a distribution network, understanding the legal framework governing these arrangements is essential for protecting your business interests.

What Is an Agency Agreement Under Malaysian Law?

Under the Contracts Act 1950, specifically Part X (Sections 135-191), an agency relationship is created when one person (the agent) is authorised to act on behalf of another (the principal) in dealings with third parties. The agent's actions, when performed within the scope of their authority, legally bind the principal.

Agency agreements in Malaysia can arise through express appointment (written or oral), implied conduct, necessity, or ratification. For commercial purposes, a well-drafted written agreement is strongly recommended to clearly define the scope of the relationship and avoid disputes.

Types of Agency Arrangements

Exclusive Agency

The principal appoints only one agent for a specific territory or product line. The agent typically receives enhanced protection and higher commission rates in exchange for focused representation.

Non-Exclusive Agency

The principal retains the right to appoint multiple agents and may also deal directly with customers. Commission structures are usually lower, reflecting the reduced commitment.

Del Credere Agency

The agent guarantees the performance of third parties they introduce to the principal. In exchange for this additional risk, del credere agents typically receive higher commission rates.

Duties and Obligations of Agents

Malaysian law imposes several fundamental duties on agents, which cannot be contracted out of entirely:

Duty to Follow Instructions

Under Section 164 of the Contracts Act 1950, an agent must act within the scope of authority granted and follow the principal's lawful instructions. Deviation may render the agent personally liable for any resulting losses.

Duty of Skill and Diligence

Section 165 requires agents to conduct business with the skill and diligence reasonably expected in their profession. A commercial agent handling technical products, for instance, should possess adequate product knowledge.

Duty to Account

Agents must maintain proper records and render accounts to the principal upon request. All money and property received on the principal's behalf must be properly accounted for and handed over.

Duty to Avoid Conflicts of Interest

An agent must not place themselves in a position where their personal interests conflict with their duties to the principal. This includes not making secret profits and not acting for competing principals without disclosure and consent.

Duty of Confidentiality

Agents must protect confidential information obtained during the agency relationship. This duty typically survives termination of the agreement.

Principal's Obligations

Principals also bear important obligations towards their agents:

  • Payment of Commission: As agreed in the agency agreement or, in the absence of agreement, a reasonable amount based on industry practice
  • Reimbursement of Expenses: Legitimate expenses incurred by the agent in performing their duties
  • Indemnification: Protection against liabilities arising from lawful acts performed within the scope of authority

Commission Structures and Payment

Commission arrangements should be clearly documented to prevent disputes. Key considerations include:

Triggering Events

Define precisely when commission becomes payable. Common triggers include order placement, contract signing, delivery, or payment receipt. Each has different risk implications for both parties.

Commission Rates

Specify rates clearly, including any tiered structures based on volume or value thresholds. Consider whether rates apply to the gross or net transaction value.

Post-Termination Commission

Address whether the agent is entitled to commission on orders received or transactions completed after termination but resulting from their efforts during the agency period.

Clawback Provisions

Consider whether commission should be refundable if the customer defaults on payment or returns goods within a specified period.

Termination of Agency Agreements

Understanding termination rights is crucial for both principals and agents:

Termination by Agreement

Parties may agree to terminate at any time. Written confirmation is advisable to avoid disputes about the effective date and outstanding obligations.

Termination by Notice

Most commercial agency agreements provide for termination by either party giving written notice. Notice periods typically range from 30 days to six months, depending on the nature and duration of the relationship.

Termination for Cause

Material breach, insolvency, or misconduct may justify immediate termination without notice. The agreement should clearly define what constitutes grounds for summary termination.

Termination by Operation of Law

Agency relationships automatically terminate upon the death or mental incapacity of either party, destruction of the subject matter, or the principal becoming insolvent.

Competition Act 2010 Compliance

Agency agreements must be structured carefully to comply with the Competition Act 2010, which prohibits anti-competitive agreements and abuse of dominant position.

Vertical Agreements

Agency agreements are vertical arrangements between parties at different levels of the supply chain. While generally less problematic than horizontal agreements between competitors, they can still attract scrutiny.

Prohibited Practices

Avoid provisions that may be considered anti-competitive, including:

  • Resale Price Maintenance: Fixing minimum resale prices (though recommended retail prices are generally acceptable)
  • Exclusive Dealing: Preventing agents from handling competing products may be problematic if it significantly restricts competition
  • Market Allocation: Dividing territories between agents in ways that eliminate competition
  • Tying Arrangements: Requiring agents to purchase unwanted products as a condition of obtaining desired products

Safe Harbour Considerations

The Malaysia Competition Commission (MyCC) has indicated that agreements between parties with limited market share (generally below 20-25%) are less likely to raise competition concerns. However, this is not an automatic exemption, and each arrangement should be assessed on its merits.

Best Practices for Drafting Agency Agreements

To create robust, enforceable agency agreements, consider these practical recommendations:

Clear Scope Definition

Precisely define the products, services, territory, and customer segments covered by the agency. Ambiguity leads to disputes.

Performance Standards

Include measurable targets and key performance indicators. This provides objective grounds for assessing agent performance and justifying termination if necessary.

Intellectual Property Protection

Address the agent's right to use trademarks, trade names, and marketing materials, and ensure these rights terminate with the agreement.

Reporting Requirements

Specify regular reporting obligations covering sales activities, market intelligence, and customer feedback.

Dispute Resolution

Include clear dispute resolution mechanisms, whether through negotiation, mediation, arbitration, or litigation. Specify governing law and jurisdiction.

Governing Law

For domestic arrangements, Malaysian law should apply. For cross-border agency relationships, carefully consider which jurisdiction's laws should govern.

Conclusion

Agency agreements are powerful tools for expanding business reach and accessing new markets. However, they create significant legal relationships with important duties and liabilities for both parties. Careful drafting, clear communication, and compliance with competition law are essential for successful agency arrangements in Malaysia.

Whether you are a principal seeking to appoint agents or an agent evaluating a proposed arrangement, professional legal advice tailored to your specific circumstances will help ensure your interests are properly protected.

Disclaimer: This article is intended for general informational purposes only and does not constitute legal advice. The information provided may not reflect the most current legal developments and should not be relied upon as a substitute for professional legal counsel. Every situation is unique, and readers should consult a qualified lawyer regarding their specific circumstances before taking any action based on this content. No solicitor-client relationship is created by reading this article.