RIGHTS AND LIABILITIES OF AN UNDISCLOSED PRINCIPAL IN A CONTRACT OF AGENCY: Lawcirca

RIGHTS AND LIABILITIES OF AN UNDISCLOSED PRINCIPAL IN A CONTRACT OF AGENCY

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Special contracts in its normal sense is used to denote an explicit contract i.e. it clearly define and settles the rights and obligations of the parties towards each other, the terms of which are ascertained, by the reasoning of law from the very nature and circumstances of the transaction. Contracts of the agency also fall under the category of special contracts. The very basic essence of any agency contract is the relationship between the principal and the agent i.e. the principal is too busy to carry out his part of the promise and hence hires an agent for the same. In this paper, I will be discussing the rights and liabilities of an undisclosed principal arising out of a contract of agency. Undisclosed Principal is one of the concepts covered under the law of agency. Under this concept the identity of the principal acting through the agent is not disclosed i.e. the third party assumes the agent to be acting for himself or the principal.

Since, the agent makes such a representation either under instructions of the principal or from his own accord, he is personally held liable, besides some exceptional cases.

This topic is relevant as it removes the liability from the agent and defines the rights of the principal in a contract wherein the benefit received by the principal is indirect.

In the normal course of agency, it is usually the duty of the agent to disclose the complete facts regarding his agency and contract with the third party in the name and account of the principal. However, in some cases the agent might intentionally or unintentionally decide not to disclose this information. He may either adopt to disclose the existence of a principal and conceal the name and identity of that principal or he may just choose to completely conceal the involvement of a principal. In both these cases the agent makes himself personally liable for any breach of contract on either his part or on the part of the principal against the third party.

However, there is always a debate regarding the principal’s liability once discovered by the third party. One of the views regarding the same is that the principal should be liable since he is the one who authorizes the contract and is entitled to the benefits received. Whereas, the other point of view stands against the liability of the principal as it claims that a person who had not been an apparent party to the contract for the benefit of the third party against a liability which he neither contemplated not stipulated. [i]

If we look closely at a case of undisclosed agency it is quite similar to a disclosed agency with the only difference being the concealment of the identity or existence of the principal. In both the cases, the agent acts and enters in a contract with the third party on behalf of the principal, the benefit of which will also be reaped by the principal. According to the basic law principals in both the situations all the three parties i.e. the third party, the agent and the principal will be bound to the contract even though the identity of the principal has been kept a secret, however, the latter seems to be contradictory as ‘meeting of minds’ in case of the principal and the third party did not take place directly (but directly, via an agent) because of lack of knowledge of third party regarding the undisclosed principal’s identity and also, therefore, violating the consent theory of contracts. [ii]

In one of the articles upon the subject by Professor Ames in the Yale Law Journal suggests a solution to this debate. According to the professor instead of attempting to work out a rule which would hold the principal directly liable, the liability should be directed as prescribed in the contract i.e. upon the agent, and since it is one of the duties of the principal to absolve the agent from the liabilities incurred on his account, and hence would put the liability where it justly belongs i.e. upon the principal on whose account the contract had been made. [iii]

Another problem which arrives while dealing with cases of undisclosed principal is the obligation of the third party towards the principal. In any case, the third party will be liable to the principal as long as (1) the agent acted with authority and must have been acting within the scope of the authority given to him and (2) the principal was not excluded as a party in any form by the terms of the contract. Another important fact that should be emphasized is that the concealment of the identity of the principal must not be fraudulent; neither should there be an existence of an offset or similar defence against the agent which could be used by the third-party against the principal.

While dealing with such cases, the courts also have to put significant importance upon the facts of the respective cases, wherein it is verified whether the existence of the principal would have had substantially caused a change in the rights and duties of the third party and if performance of contract increased the burden of risk imposed on the third party or materially impair it from receiving a return performance. An example of this case can be Kelly Asphalt Block Co. V Barber Asphalt Paving Co. [1] wherein the court held in favour of the buyer who had been the undisclosed principal who suspected the refusal of a competitor to deal with him. The concealment of the identity of the principal was considered to be significant in these cases as due to personal issues between the third party and the principal or the status of the principal etc. could have prevented the third party to enter into the contract.

Another aspect which is very important to be considered is the cases wherein the liability lies upon the agent[iv] or the cases where principal is exempted from his liability towards the third party[v]. Since both the principal and agent are equally prone to flight, it is also important to understand the agent’s obligations.

An agent will be liable to the third party wherein he makes an unauthorized contract either on the basis of his status as a party to the contract or some breach of implied warranty of authority i.e. he acts outside the scope of the authority given to him. The theory behind this is either misrepresentation or breach of an implied warranty of authority.  However, this is challenged on the grounds of efficiency from time to time. [vi]                                                                                                         

The concept of the undisclosed agency or section 232 of the Indian Contract Act, 1872[vii] along with it brings a lot of controversy and area for interpretation. It suffices to say that an undisclosed principal is always at a risk of flight which puts both the third party as well as the agent at the risk, but so is the principal, in a situation wherein the third party might refuse to fulfil their part of the deal. Therefore, it is very important to interpret and specify the duties of each and every party which might be directly or indirectly involved in the contract in order to protect their individual interests. The whole of the concept is pretty much based on the relationship between the parties and the roles that they play as well as the situation/facts of the case.

[i] Kelly Asphalt Block Co. v. Barber Asphalt Paving Co. 211 N.Y. 68 (1914)

[ii] (Mechem, 1910)

[iii] (Barnett, 1969 (1987))

[iv] (Ames, 1909)

[v] S.230. Agent cannot personally enforce, nor be bound by, contracts on behalf of the principal

[vi] S.230 PERSONAL LIABILITY OF THE AGENT : presumption of contrary contract

[vii] (Rasmusen, 2001)

[viii] S. 232 Performance of a contract with agent supposed to be principal: 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


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Shaina Khurana

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Shaina is a very hard-working and diligent writer. She does her work fervently and makes sure that whatever task she takes is completed in given time and is qualitative. She is an avid reader and also has been a writer for school magazine. Besides these, her hobbies include poetry and sketching.

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