Doctrine On Undisclosed Principals: Liability And Rights In Essay.

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?

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? 

Liabilities and Rights conferred by Doctrine on Undisclosed Principals

The undisclosed agency, whether an undisclosed principal can be legally bonded with a third party by an agent who had limited authority. 

In common law, the term undisclosed principal denotes a person or corporation principal whose existence is only known by the agent, but not the third party who forms the agreement with the agent. The lack of the information about the principal causes the transacting third party to believe that the person he is contracting with is the owner or the principal. The rules that apply to doctrine on undisclosed principals in common law imposes liabilities while still conferring the right to the undisclosed principals, notwithstanding that the principals remain in the privity of the contracts between the agents and the third parties. One of the earliest cases in applying this authority was the case of Humble v Hunter. However, this case provides exceptional situations where the doctrine would not apply which would be discussed later. Another authority is the case of Teheran-Europe Co Ltd v S T Belton (Tractors) Ltd where the court ruled that both the third party and the principal can sue each other in an undisclosed agency. In this case, the plaintiff was a foreign Persian company who used its agent to enter into a sale agreement for the purchase of compressors from the defendant. The compressor turned out to be defective hence it came out to sue the defendant for damages.

The principles do not shield the agent from liabilities even when it comes to the knowledge of the third party that the agent was acting on the expense of an existing principal. However, the law cannot allow the third party to sue both of them, and the judgment would only apply to the party he/she chooses to sue. Another rule within this doctrine is that the fact that the principal exists does not exonerate the agent from the prospects of contractual liability. The elements for the application of this doctrine were summarized in the ruling of Siu Yin Kwan v Eastern Insurance Co. For one, Lord Lloyd affirmed that there is nothing prohibits the undisclosed principal to be sued or to sue. However, the agent must be acting within the authority which would manifest the intention to bind the principal. The same reasoning was upheld in Keighley Maxted and Co. v. Durant that agent who exceeds his/her authority would be acting on his/her own but not that of his principal. In Cooke & Sons v Eshelby, it was held that the third party should always ask when unsure to have information whether the agent has the authority; if the agent lies, he/she can be sued under misrepresentation. Additional elements that should be present is that nothing prevents the third party from bringing the same defense he had on the agent to the arguments against the principal. Also, where both the third party and the agent manifests an intention to prevent any external evidence, the intervention of the principal would be illegal in law. 

Exceptions where Doctrine on Undisclosed Principals would not apply

There are still situations when these rules would not apply. For instance, in a transaction that is clear that the agent intended to be in his own authority rather than that of his/her principal, the principal intervention would not be admitted. An authority for this rule is the ruling in Humble v Hunter. In this decision, the agent contracted as the principal or ‘owner.’ Also, the doctrine cannot be called where the contract required the agent’s skills, identity, or his/her reputation. An authority for such a situation is the case of Said v Butt. This was a case where the principal was prohibited from entering a theater, and he asked the agent to buy the ticket in his (agent) name. As the identity and reputation of the people who were buying the tickets was a crucial requirement, the principal could not intervene. Again, where the principal lacks the capacity to contract, it cannot purport to have authorized the agent to form the contract. An example of such a situation regards pre-incorporation contracts. In an agent forms a contract on behalf of a corporation that is not incorporated, the law will not allow the company to intervene when the claim is elected by the third party. Lastly, where an agent has a defense on the agent’s misconducts, the principal’s entry to the suit would be barred. An example of such circumstances is where the agent defrauds the third party.

On application, the first step is identifying the agency relationship that exists between ‘A’ and ‘P’. The rationale for the identification of any agency relationship can be derived from the comments of Finn LJ in South Sydney District Rugby League Football Club Ltd v. News Ltd that agency can be ascertained by an analysis of the parties’ contract, express words, the course of dealings or trade practices. Since the ‘P’ had already instructed ‘A’ to do something on his behalf, there is an agency relationship. The second step would be identifying the authority. For actual authority, the Australian Full federal court in Poulet Frais Pty Ltd v. The Silver Company Pty Ltd stated that the authority is a matter of what the parties expressly say. Therefore, ‘A’ had actual authority to only purchase a jewelry with a price not exceeding $50,000. Exceeding this price was out of the authority granted. In Keighley Maxted and Co. v. Durant, the court found that any agent who exceeded the limit of the amount authorized for purchases was acting on his own authority but not that of his principal.  Therefore, “TP” cannot sue “P” because ‘A’ was not within his authority.

Application of Doctrine on Undisclosed Principals

Conclusion

When ‘A’ exceeded the required amount of $50,000, she was not acting on the actual authority of the principal. ‘TP’ would not be able to sue ‘P’.

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

Disclosed authority focuses more on the knowledge of the third parties, a manifestation of the principals, and the reliance of the third parties on the manifested authority. For instance, in actual authority, as described, above, the agent must have express authority, but an additional requirement is that the third parties must be reasonably informed about any limitation to the authority. For instance, in Ireland v Livingstone, despite that the principal (Livingston) had ordered the agent (Ireland) to procure sugar in tons 500 plus or minus, the principal could not deny the authority when the agent procured 400 tons. Therefore, in actual authority where the ‘TP’ did not know that ‘A’ authority was limited to $50,000, ‘P’ would still be liable for not informing ‘TP

Similarly, in usual authority, the principal is still liable because the agent is deemed to be acting within the duties of his/her position. For instance, in Watteau v Fenwick, Humble was previously the owner of a pub before being employed to work as house manager at Fenwick. When a dispute arose from a contract between Humble and Watteau, the court ruled that despite the fact that Humble did not have the actual authority, having had the knowledge of a pub manager had the actual authority when working for Fenwick. On the application of this rule to ‘P’ and ‘TP’, the position that ‘A’ has been employed may show that she had the usual authority to bind ‘P’ with ‘TP.’ Therefore, application of this authority would still leave ‘P’ liable to ‘TP.’

Lastly, apparent authority works where three elements are present. The manifestation of principal’s authority on the agent through their previous dealings, the third party’s reliance on the manifested authority, and the third party’s proof that he/she relied on the manifestation to change contractual position.  On application of these rules would require the previous dealings between ‘P’ and ‘TP’ through ‘A’. If there would be such a connection, ‘P’ would be liable.  

Conclusion: in, either way, the disclosed authority would leave ‘P’ liable.

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

No, ‘A’ would not be liable as because disclosed authority focuses more on the third party’s reliance on the disclosed authority.  ‘P’ had not informed ‘TP’ earlier on the limitation of the authority of ‘A’ which could have prevented the reliance. Therefore, ‘A’ would not have been liable. It is ‘P’ who would be liable.

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

An analysis of the limitation to the application of the rules of undisclosed principal discussed above shows that nothing can stop ‘P’ from ratifying the contract made by ‘A’ with ‘TP.’ As mentioned above, the principal would be barred from intervening where the contract expressly excludes him, where he lacks contractual capacity, where the third party demonstrates that skills, identity or personality were crucial to the validity of the contract, and where any person in the third party’s position holds against the agent. For instance, in Bolton Partners v Lambert, the contract formed between the third party and principal’s agent was ratified to permit the principal to sue for damages. As per the facts provided, ‘P’ can ratify ‘A’ contract with ‘TP’, and the contract would be as valid as though it was made directly with ‘P’.

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

Humble V Hunter (1846) 12 QB 310

Ireland v Livingstone [1872] LR 5 HL 395

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

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

Said V Butt (1920) 3 KB 497

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