Rights And Liabilities Of An Undisclosed Principal In Agency

By Samarth Trigunayat, CNLU

Editor’s Note:The principle of Agency is a type of special contract entered into by two or more people, wherein one person (agent) acts on behalf of the other (principal).Such an agent can have one or more sub agents. Undisclosed Principal is a concept covered under law of Agency. Undisclosed Principal is a person who acts through an agent for the purpose of any negotiations with the third party, without his identity being disclosed. The third party does not know about the existence of such principal and deems the agent as if he is acting for himself. In other words, the third party considers the agent to be the principal. The agent usually makes such representation as per instructions of the principal or at times if he clearly wishes to bind himself only. The agent is held personally liable in such cases, except in exceptional circumstances. Common Law however does not completely exempt such Undisclosed Principal and imposes certain duties and liabilities in case of default and also guarantees certain rights to him. This is an exception to the general rule of privity of contract.”

UNDISCLOSED PRINCIPAL

In the Contract Law, the term undisclosed principal relates mainly to the liability of an agent for obligations incurred on behalf of a principal. If the agent does not disclose the nature of his agency (the fact that he acts on behalf of another) and thus does not disclose the name of the principal, the agent may be held personally liable for his actions. If, however, the agent disclosed his agency and the name of the principal (disclosed principal), he will normally not be held liable for commitments undertaken within his authorized agency. A dummy buyer may sometimes have an undisclosed principal.

An undisclosed principle is a person who uses an agent for his/her/its negotiations with a third party, often when the agent pretends to be acting for him/her. As a result, the third party does not know he/she can look to the real principal in any dispute.

If the principal is undisclosed at the time of the transaction, but subsequently discovered, the third person may elect to hold such principal because he is the real party in interest.

We have heretofore noticed that an agent may keep his principal undisclosed, and bind himself upon the contract. He may do this because he acts under instructions to that effect, or because he is careless in the manner in which he performs his agency, or because for some reason he chooses to bind himself. In such a case, he becomes, as we have seen, personally liable to the third person. But the third person, upon discovering the identity of the principal, may, subject to the exceptions hereafter stated choose to hold the principal. This arises out of the consideration that the principal is the real party in interest and identified in the transaction with his agent, and that as he is the real party, it ought to be the third person’s right to hold him as such[i].

Thus we may suppose that A is about to buy goods of C for P. He chooses however, to act in his own name and either to keep the fact concealed that there is another person who is principal, or if he discloses the fact that there is a principal, then to keep that principal’s identity concealed. He therefore makes a contract with C, whereby for certain goods which C delivers him, he promises to pay C a certain amount of money. This is, say a written contract executed in A’s name as though he were the real principal. C can hold A on this contract, whether he knows that A is only an agent or not. And if at the time, he does know that A is only an agent and knows the identity of A’s principal, he cannot afterwards hold P, because in that case he may be said to have deliberately chosen to make his contract with A and not with P. If, however, at the time he does not know that A is merely an agent, or if he does know he is an agent but does not know the principal’s identity, then he may upon discovering the identity of the principal, either continue to hold A or elect to hold P.

PROVISIONS UNDER INDIAN LAWS 

An undisclosed principal generally refers to a principal person whose existence is unknown to the third party with whom the agent deals and so, in the eyes of the third party, the agent is the principal. Common law doctrine on undisclosed principals confers rights and imposes liabilities on the undisclosed principal, notwithstanding that he is not made a party to the relevant contract. This doctrine is an exception to the general rule that only a party to a contract may sue and be sued thereon. The rules under this particular doctrine may be illustrated by considering the respective relationships between the principal and the agent, the principal and the third party, and the agent and the third party[ii].

Undisclosed Principal And Agent

The rights and duties between the principal and the agent in an undisclosed principal situation are basically the same as in a disclosed principal situation, as discussed in Sections 5 and 6. The agent is to be treated as a trustee for the undisclosed principal of any goods or payments received or any benefit that he derives from the contract with the third party and is liable to account to the principal for such goods, payment or benefit, as in the case of the disclosed principal.

Undisclosed Principal And Third Party

Before the undisclosed principal may enforce any right or be liable for any obligation under a contract apparently made between the agent and the third party, two pre-conditions have to be met:

  • The agent must have actual authority, whether express or implied, to enter into the contract in question with the third party; and
  • The agent on entering into the contract with the third party must have intended to act on behalf of the undisclosed principal, not for his own benefit.

RIGHTS OF UNDISCLOSED PRINCIPLE

An undisclosed principal generally refers to a principal person whose existence is unknown to the third party with whom the agent deals and so, in the eyes of the third party, the agent is the principal. Common law doctrine on undisclosed principals confers rights and imposes liabilities on the undisclosed principal, notwithstanding that he is not made a party to the relevant contract. This doctrine is an exception to the general rule that only a party to a contract may sue and be sued thereon. The rules under this particular doctrine may be illustrated by considering the respective relationships between the principal and the agent, the principal and the third party, and the agent and the third party.

According to Section 231, if an agent makes a contract with a person who neither knows, nor has reason to suspect, that he is an agent, his principle may require the performance of contract.

The rules governing the rights and liabilities between the undisclosed principal and the third party are as follows[iii]:

  1. Generally, an undisclosed principal can sue and be sued by the third party under the contract subject to exceptions mentioned in paragraph (d) below.
  2. An undisclosed principal remains liable to a third party for the price of goods sold or services provided under the contract made in the agent’s name with the third party. The undisclosed principal’s liability will not be discharged even if he has made payment to the agent with instruction that the agent pays over the same to the third party, if the agent fails to pay the third party as instructed.
  3. Where the existence and identity of the principal is disclosed and where the third party is to take action for recovery of any amount payable to him under the contract, the third party can elect to sue either the undisclosed principal, or the agent.
  4. There are cases when an undisclosed principal may not sue or be sued by the third party under the contract made between the agent in the agent’s name and the third party. A major category is where the identity of the party in a contract is material. The following are examples of such cases:
  • A promise by the third party to lend money to the agent personally cannot be enforced by an undisclosed principal.

  • A contract involving a strictly personal skill or service cannot be performed by an undisclosed principal. For example, a contract for a picture painted by a named painter or a concert performance by a named artist cannot be performed by an undisclosed principal, as such performance involves the personal identity and skill of the agent which induces the third party to enter into the relevant contract with the agent.

  • Where the landlord is induced by the identity, creditworthiness and reputation of the tenant (who is in fact an agent) to enter into a tenancy agreement with him, an undisclosed principal may not be able to replace the agent as tenant under the tenancy.

  • If the undisclosed principal or agent is aware that the third party will not contract with the undisclosed principal for whatever reasons, the undisclosed principal can not make use of an agent to procure the contract with the third party.

LIABILITIES OF PRINCIPAL AGAINST THIRD PARTY

If the Principal wants to acquire the performance of contract, he can do so subject to the rights and obligations between the agent and the third person. When the third person is innocent and ignorant, that the agent was acting for a principal, if the principal wants the performance of such contract the rights and the liabilities of the third party is protected. Section 232 contains following provisions in this regard:

Where one man makes a contract with another, neither knowing nor having reasonable ground to suspect that the other is an agent, the principal, if he requires the performance of the contract, can only obtain such performance subject to the rights and obligations subsisting between the agent and the other party to the contract. Illustration A, who owes 500 rupees to B, sells 1, 000 rupees’ worth of rice to B. A is acting as agent for C in the transaction, but B has no knowledge nor reasonable ground of suspicion that such is the case. C cannot compel B to take the rice without allowing him to set- off A’s debt.

A, who owes 500 Rs to B, sells 1000 Rs worth rice to B. A is acting as an agent to C in the transaction, but B has no knowledge nor reasonable ground of suspicion that such is the case. C cannot compel B to take the rice without allowing him to set off A’s debts.

So far as the third person is concerned, according to section 231 he has, as against the principal, the same rights as he would have had against the agent if the agent had been the principal. If, however, the principal discloses himself before the contract is completed, then the other contracting party may refuse to fulfill the contract if he can show that, if he had known who was the principal in the contract, or if he had known that the agent was not a principal, he would not have entered into contract[iv].

An agent who enters into a contract with a third party, without disclosing that he is in fact entering into the contract on behalf of a principal, will be treated as the principal by the third party. Hence, he may sue or be sued by the third party under the contract so long as the principal remains concealed. When the existence and identity of the principal is disclosed, the third party is entitled to elect (choose) whether to sue the principal or the agent. If the third party elects to sue and obtains judgment against the principal, the third party will not be entitled to sue the agent, even if the third party cannot recover any damages from the principal. If, in respect of the contract, the undisclosed principal himself sues the third party or settles with the third party, then the agent cannot sue the third party under the contract[v].

CONCLUSION

In the field of law, the term undisclosed principal relates mainly to the liability of an agent for obligations incurred on behalf of a principal. If the agent does not disclose the nature of his agency (the fact that he acts on behalf of another) and thus does not disclose the name of the principal, the agent may be held personally liable for his actions. If, however, the agent disclosed his agency and the name of the principal (disclosed principal), he will normally not be held liable for commitments undertaken within his authorized agency. A dummy buyer may sometimes have an undisclosed principal.

When the rights of an undisclosed principal are in question courts recognize that he was in a better position to protect himself than the outsider. Therefore his rights are limited by any defense or claim the defendant third person had against the agent. But this concern for the third party’s plight is not as evident when he is the one trying to assert rights. Because the nature of the transaction was hidden from him at the outset, he had no opportunity to demand the obligation of both principal and agent, as he otherwise might well have done. Yet on his discovery of the true facts the election rule is interposed to prevent his doing the same thing.

Requiring an election of remedies by one dealing with an undisclosed principal ignores the policy considerations which distinguish the undisclosed principal’s obligation from that of the agent. All of them furnish arguments that his liability should not be alternative to the agent’s but available to the third party in addition. Only if it is so available can the latter have any fair assurance he will be able to satisfy his claim.

An undisclosed principal generally refers to a principal person whose existence is unknown to the third party with whom the agent deals and so, in the eyes of the third party, the agent is the principal. Common law doctrine on undisclosed principals confers rights and imposes liabilities on the undisclosed principal, notwithstanding that he is not made a party to the relevant contract. This doctrine is an exception to the general rule that only a party to a contract may sue and be sued thereon. The rules under this particular doctrine may be illustrated by considering the respective relationships between the principal and the agent, the principal and the third party, and the agent and the third party.

Formatted on 15th March 2019.

Footnotes

[i]Violett v. Powell’s Adm’rs, 10 B. Monr. 347

[ii]http://www.eaa.org.hk/Home_original/Publications/AgencyLaw/10Undisclosedprincipals/tabid/388/language/en-US/Default.aspx, accessed on 3/10/2013.

[iii]http://www.eaa.org.hk/Home_original/Publications/AgencyLaw/10Undisclosedprincipals/tabid/388/language/en-US/Default.aspx, accessed on 3/10/2013.

[iv] Bangia, R.K. ‘Contract II’, Allahabad Law Agency, Faridabad, 2013.

[v]http://www.eaa.org.hk/Home_original/Publications/AgencyLaw/10Undisclosedprincipals/tabid/388/language/en-US/Default.aspx, accessed on 3/10/2013.

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