Undisclosed Agency: Rules For Suing The Principal And Exceptions

P instructs A to purchase some jewellery from TP for no more than $50,000, and because she wishes to remain anonymous, P asks A not to disclose her identity to TP. In fact, A does not even disclose to TP that she is acting for another party in her negotiations with him.
TP refuses to sell for less than $60,000 and A, realising the potential value of the jewellery, agrees to pay $60,000 believing that P will consent to that price on learning of the circumstances.

In fact, P refuses to pay for the jewellery. Explain, with reasons, whether TP can enforce the contract against P (upon learning of her identity)

(i)Might your answer be different if A had disclosed that she was acting as P’s agent at the beginning of her negotiations with TP. Why or why not?

(ii)Could A be liable to TP in the circumstances set out in (i)? If so, on what basis? If not, why not?

(iii)Conversely, if on the facts you were originally given [ignoring (i) & (ii)], P had chosen to accept the contract entered into by A but TP refused to honour it, could P sue TP? Why or why not? 
 

Principles of Undisclosed Principal

Undisclosed agency, whether a third party who has formed a contract with an agent with limited authority would be able to sue the principle in undisclosed agency.

The principles of undisclosed principal deals with situations where agents will be acting on the authority granted by principals, then the agent would execute transactions with the third parties on the expense of the principals, but the agent will not disclose to the third parties the concealed relationship with the principal. Generally, when third parties transact with agents, and the third parties do not know whether the people they are contracting are agents representing their masters. However, the law allows any of these parties, either third party, the principal, or the agent to bring a suit to each other independently in case of a breach of the contractual terms. The authority for this rationale was held in Teheran-Europe Co Ltd v S T Belton (Tractors) Ltd where the court allowed the principal, Teheran-Europe to sue ST Belton for the defective compressor.  In addition, the case also established that even foreign undisclosed principals can benefit from this doctrine. Despite that, all principals who want to benefit from the doctrine must disclose themselves before suing for the benefit.

Another rule within this doctrine is that the fact that the principal exists does not exonerate the agent from the prospects of contractual liability. When a principal has been disclosed, the third party still retains the authority to sue the agent, but in this time, he may chose to sue the principal. In Siu Yin Kwan v Eastern Insurance Co Lord Lloyd stated the legal requirements for these principles to apply. For (1) the undisclosed principal can commence a suit or be sued for the liabilities flowing from the contract formed between the third party and the agent who was acting on his authority. This rationale was explained in the case of Keighley Maxted and Co. v. Durant that the rule will only apply to agents who act within the awarded by their principal. Other elements as advised by Lord Lloyd are that the agent must intend to bind the undisclosed principal with the third party during the formation of the contract; the third party is allowed to use the same defence he has on the agent to the principal; the contract can include terms that prevent the principal from intervening.  

Two exceptions exist for the rules stated above. For one, the doctrine will never apply where the agent intended to be the owner or the principal. That is, when the agent transacts with a third-party purporting to be the ‘owner,’ and the third party believes that he/she is transacting with the ‘owner,’ the third agent is treated as the principal or owner, and the undisclosed owner cannot come later asserting that there was an agency.  The earliest authority for this principle is the case of Humble v. Hunter where the son of the plaintiff formed a contract with the defendant purporting to be the owner, later when a dispute arose, the claimant asserted that there was an agency. 

Rules for Suing the Principal

The second exception is that the doctrine will not apply where the identity, skill, or reputation of each of the contracting parties is crucial to the contractual arrangements. That is, where the third party demonstrates that he intended to only contract with the agent, and there is proof that the third party would not have refrained from the contract if he had information that the person he was contracting with was representing somebody (undisclosed principal), the court will not allow the principal to to be enjoined or to intervene. For instance, in a contract of employment, an employee under a contract cannot purport to have taken the employment on behalf of a principal. An authority for this rationale is the case of Said V Butt where a ticket bought by someone under his name on behalf of another person could not be used to let that person in. The principal cannot intervene where he lacked the capacity to contract. For instance, a corporate maybe unable to ratify a contract where an agent formed a contract before its existence. The principal cannot intervene where the third party has a solid defense against the agent. 

On application, it is a fact that the agency relationship between “P” and A fits the definition above for undisclosed principal. A determination of whether “TP” can sue “P” would require a test where the elements for the application of the doctrine of undisclosed relationship discussed above, and the exceptions of the doctrine fit this situation. The first requirement is that the agent should be acting on his/her authority as maintained in the ruling of Keighley Maxted and Co. v. Durant. On analysis, “A” had actual authority to purchase jewelry but not to exceed $50,000. Therefore, exceeding $50,000 to buy at $60,000 was not within the scope of her authority. The fact of this case matches those of the case of Keighley Maxted and Co. v. Durant. In this case, K & Co, authorized its agent Roberts, to purchase wheat, Roberts, without any authority purchased the wheat at a price that exceeded the limit he was given, and hence the  K& Co refused to pay. When the defendant sued the claimant for the loss, the court at first ordered the claimant to pay the loss, but this judgment was reversed upon appeal.  Therefore, it can be concluded that P would not pay TP for the payment as A was not acting within P’s authority.

Exceptions to the Rules

Conclusion

A was only authorized to purchase the jewelry for a price, not more than $50, 000. Exceeding this price was outside the authority, and hence “TP” can only sue “A” but not “P”. 

(i) What if “A” disclosed the agency relationship with “P”

If “A” disclosed that she was acting as an agent of “P”, the rules that would have applied would be those of a disclosed agency. In a disclosed agency, a contract entered between a third party and an agent bind the principal as though it was formed between that principal and the third party. However, this rule may be differ depending on the authority of the agent. For instance, in actual authority, the agent is only allowed to work within the given express instructions. An authority in this rule is the case of in Hely-Hutchinson v. Brayhead Ltd where the court affirmed that people appointed in positions have actual authority which can also extend to implied authority. In implied actual authority, agents can use their judgment upon the authority conferred in actual authority. In usual authority, agents use the authority that flows from their position as ruled in Watteau v Fenwick . In apparent authority, the conducts of the principal must be the ones that make the third-party trust that the said agent has the authority in the transaction.

On application of the rules of disclosed authority, “P” had actual authority to contract with $50,000. However, actual authority applies only where the third party is aware of the limitation of the authority. In addition, it could be argued that A had implied-actual authority to contract with $60,000, but that would depend on their contractual relationship with “P”. In, either way, “P” would be liable in disclosed authority since TP has sufficient information on agent’s limitation 

Could A be liable to TP in the circumstances set out in (i)?

No, where “TP” was not aware of the limitation to not exceeding $50,000, “P” would be liable. The only way “P” could have avoided liability is making sure that “TP” was aware of the limitation. Therefore, “A” was not liable to “TP” because P had not disclosed the limitations to “TP”

Could “P” sue the “TP” in case “TP” refused to honor the contract with “A”

On application, it would require a test whether the case falls within the rules of the exceptions of the doctrine of the undisclosed principal. Like as discussed above, the only the principle cannot intervene if there is an express or implied intention to exclude him/her (ii) where he lacks capacity (iii) where the third party shows an intention that he would not have entered into the contract if he was aware of that the agent was acting on behalf of someone else (iv) the third party has a defense on the agent. 

Regarding the facts in the scenario of “P”, “A”, and “TP”, none of these is available from the facts. Therefore, “P” can sue TP” to enforce the contract. 

Burnett, Robin and Vivienne Bath, Law of International Business in Australasia (Federation Press, 2009)

Card, Richard, John Murdoch and Sandi Murdoch, Real Estate Management Law (Oxford University Press, 7th ed, 2011)

Chen-Wishart, Mindy, Alexander Loke and Stefan Vogenauer, Formation and Third Party Beneficiaries (Oxford University Press, 1st ed, 2018)

Mann, Richard A and Barry S Roberts, Essentials of Business Law and the Legal Environment (Cengage Learning, 12th ed, 2018)

Roach, Lee, Card and James’ Business Law (Oxford University Press, 3rd ed, 2014)

Hely-Hutchinson v Brayhead Ltd (1968) 1968 QB 1

Humble V Hunter (1846) 12 QB 310

Keighley Maxsted & Co v Durant & Co [1901] AC 240

Said V Butt (1920) 3 KB 497

Siu Yin Kwan v Eastern Insurance Co Ltd (1994) 2 AC 199

Teheran-Europe Co Ltd v S T Belton (Tractors) Ltd (1968) 2 All ER 886

Watteau v Fenwick (1893) 1893 QB 1