Liabilities Of The Undisclosed Principal In Agency Relationships

Discuss about the BSL165 Foundations of Business Law.

Undisclosed Principal's Liability in Agency Relationships

The liabilities of the principal in the undisclosed agency. In particular, can the undisclosed principal be liable of actions of an agent who exceed the limit of the actual authority?

The concept of undisclosed Principal operates in situations where the third party to who the agent is contracting with has neither the knowledge of the agency nor the knowledge of the principal’s identity. Despite the lack of disclosure, most of the principles that apply to a general agency relationship still apply to the undisclosed principal. For instance, an agent can bind the principal to third parties, and both the third parties and the principals can sue each other. Also, in case the agent pays the third party while acting within the authority, the agent has an entitlement of an indemnity from the principal.

The authority for an undisclosed agency can be derived from the ruling of Teheran-Europe Co Ltd v S T Belton (Tractors) Ltd. The case concerned a dispute where the claimant, a Persian company used its agent to purchase compressors from the defendant, ST Belton. The issue arose after the claimant finding that the compressors were defective and they came out to sue for damages.The ruling did not only confirm that undisclosed principals can sue or be sued, but it also confirmed that an undisclosed principal can contract from anywherean .

Before, the undisclosed principal benefits from the agency, the law require that he/she must reveal himself, and then ratify the agent’s contract. Once a contract has been ratified, it operates as though it was made between the principal and the third party. In Bolton Partners v Lambert, the court ruled that a contract ratified by the claimants made the contract binding to the defendant. After the undisclosed principal reveals him/herself, the third party gets an option to sue either the agent or the principal if there was a breach on the contract. However, the third party cannot sue both. 

The rules that apply in the concept of undisclosed principal were summarized in Siu Yin Kwan v Eastern Insurance Co. The rules affirmed that both the third party can use the principal and vice versa. The rules require that the agent to be acting as per the authority granted by the principal. Exceeding the rules will shield the principal from the third party as it will refute the intention of the agent to bind the principal. For instance, in Keighley Maxted and Co. v. Durant, the court ruled that when the agent exceeded the amount allowed for wheat, he was acting on his own authority. Again in Cooke & Sons v Eshelby, it was ruled that it is upon the third parties to ask for information about the principal if they are unsure. Where the agent lies about the agent, it should be held that such agents have no intention to bring their principal to the contract.

Rules for Disclosing an Undisclosed Principal in Agency Relationships

Additionally, if a third party had a defense in support of the proof of liabilities of the agent, the same defense can be used when the principal is revealed. The principles would not be called if the intentions of both the third party and the agent intend not to include evidence from the principal. 

Some of the exceptions to the application of these rules were spelled in the decision of Humble v Hunter. The first exceptions emphasize the parties’ intention to exclude the principal. The rule in Humble v Hunter set that principal cannot assert that there was an agency when the agent already expressly demonstrated that he had contracted as the ‘principal’ or the ‘owner’ in the contract. The second exception is where the identity of the contracting parties is a key to the contract. For instance, in Said v Butt, it as ruled that a ticket that specified the names Also, in Again, in Greer v. Downs Supply Co, the agent had personally contracted with a third party where the consideration was a ‘discharge of the agent’s debt’ which he was owing to the third party. As identity was crucial to this contract, the principal was prevented from intervening. 

Another exception is that no principal can intervene in a contract formed before its existence. For instance, in Kelner v Baxter the court prevented the undisclosed principal from ratifying a contract that was formed before its existence. Another instance where the principal would be prevented from intervening is where the third party proves that if he/she knew that she was dealing with the agent instead of the owner, she/he would not have formed the contract. Lastly, in cases of fraud, the principal would be prevented from intervening to avoid destruction of evidence.

Applying the rules of undisclosed principal to the scenario of ‘A’, ‘P’, and ‘TP’ requires ascertaining that all the elements stated above are present. Lord Finn LJ stated that the easiest way to identify whether an agency exists is to look at the contract, conducts, express words, dealings of the parties. In this case, there was an agency relationship as the express words of ‘P’ asking ‘A’ to purchase jewelry are on his behalf ascertains that there was an agency. Since we have established the agency, the second step would be establishing the authority. In Poulet Frais Pty Ltd v. The Silver Company Pty Ltd the Australian court stated that actual authority requires express words of the parties. In this case, it can be ascertained that ‘A’ had actual authority from ‘P’ but this actual authority was limited to $50,000. In the case of Keighley Maxted and Co. v. Durant, it was established that going above the limit of actual authority can be said to be outside the principal’s authority hence the contract would not be binding to the parties. This is contrary to the first element set in Siu Yin Kwan v. Eastern Insurance Co Ltd hence the principal would not be bound to the third party.  Therefore, “TP” cannot sue “P” because ‘A’ was not within his authority.

Exceptions in the Application of the Rules for Undisclosed Principals

Conclusion

‘TP’ would not be able to enforce the contract against ‘P.’ As discussed above, ‘A’ moved out of the authority of ‘P’ when he exceeded the authorized amount of $50,000. It would be upon ‘P’ to choose whether she can ratify the contract or not.

If ‘A’ disclosed that she was working under the authority ‘P’, the law that would have applied is that of a disclosed principal. In disclosed principal, any contract formed with the agent is valid as though it was formed with the principal. This rationale was once explained of Hubbard v. Tenbrook where the court mentioned that it can be a fraud by allowing the principal to escape in times of trouble of the agency, yet he (principal) benefits from the profit of the agency.

 On the rules of actual authority, the principal can only avoid the liability by expressly limiting the authority of the agent, and then informing the third party of the limitations. Therefore, TP would be able to enforce the contract against P because ‘TP’ was not aware of any limitation. The rules of usual authority allow the third party to enforce the agreement based on the position of the agent. For instance, in Watteau v Fenwick, it was ruled that anyone employed at the managerial position has the authority on all the duties of a manager. Therefore, even the application of the rules of usual authority would find ‘P’ liable for a contract made with ‘TP.’ Also, apparent authority requires reliance on the previous conducts of the principal. If the principal manifested to the third party that the agent has authority, the court cannot allow the principal to deny such authority. Therefore, on the application, ‘P’ would still be liable if there were previous dealings with ‘TP’.  

Conclusion: ‘TP’ would be able to enforce the contract with ‘P’ in disclosed authority. e.

• Liability of ‘A’ to TP in the circumstances set out in (i)?

As discussed above, ‘A’ would not be liable to ‘TP’. The contract would be between ‘TP’ and ‘P’ since ‘P’ had not informed ‘TP’ on the limitations of the actual authority.

On analysis, a determination whether ‘TP’ can enforce the contract made by ‘A’ and ‘TP’ requires identifying whether any of the elements for the limitation of rules of the undisclosed principal as discussed above. In brief, these rules requires express terms to prohibit the principal from interfering, proof that identity is a term in the contract, proof that the agent wanted to contract as the owner, proof that the third party has evidence that can be destroyed by the entrance of the principal, and proof that the principal lacks the capacity to contract. As none of these limitations are present, ‘P’ can ratify the contract to enforce it.

Loos, Marco and Odavia Bueno Diaz, Principles of European Law: Mandate Contracts (OUP Oxford, 2013)

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

Bolton Partners v Lambert [1889] 41 Ch D 295

Cooke & Sons v Eshelby [1887] 12 App. 271

Greer v Downs Supply Co (1927) 1927 KB 2

Hubbard v Tenbrook (1889) 124 Pa.

Humble V Hunter (1846) 12 QB 310

Ireland v Livingstone [1872] LR 5 HL 395

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

Kelner v Baxter [1866] LR 2 CP 174

Poulet Frais Pty Ltd v The Silver Company Pty Ltd (2005) 2005 FCAFC

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

South Sydney District Rugby League Football Club Ltd v News Ltd (2000) 177 ALR

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

Watteau v Fenwick (1893) 1893 QB 1