Who is the Undisclosed Principal in Contract Law?

The doctrine of the undisclosed principal has been classified as an anomaly [1] because it runs counter to the principle of privity of contract, which is the contract law rule under which only parties to a contract are legally bound by and entitled to enforce it. The academic PFP Higgins submits to the difficulties that arise with regard to the doctrine since, in all contracts where an agent is involved because of the fiduciary duty owed by an agent to his principal, it is not only the common law rules that have to be considered, but also the rules of equity.[2]

The fiduciary relationship

It is fundamental to define the term agency as the fiduciary relationship which exists between two persons, one of whom expressly or impliedly manifests assent that the other should act on his behalf so as to affect his relations with third parties, and the other of whom similarly manifests assent so to act or so acts pursuant to manifestation.[3] These are the principal and the agent who are both subject to certain obligations – that the agent is bound to make a full disclosure of any personal interest which he may have in the transactions he has the power to effect as agent, whilst the principal is bound to indemnify his agent against such losses and liabilities that the agent suffers in the course of his agency.[4] It is also useful to understand the nature of the contract that is entered into by the agent on behalf of his undisclosed principal.

Clearly, the doctrine of the undisclosed principal allows the principal to sue and be sued on the contract even though the principal is not on the face of it a party to the contract and, at the same time, the agent may also sue and be sued on the contract.[5] The trouble is that this has formed clouds of confusion, due to the complexity of deciding whether the contract is that of the agent or the principal. This presents a greater concern: if the contract is that of the agent or if the principal is not really a party to the contract entered into by the agent, how can the principal intervene on a contract that would be unenforceable as between the very parties to it?[6] Lord Lindley in Keighley, Maxstead & Co v Durant [1901] AC 240, declares that the explanation for the doctrine of undisclosed principal is because the contract is ‘in truth, although not in form, that of the undisclosed principal himself’.

An intervening element

Arguing that in a contract situation the undisclosed principal doctrine involves an element of intervention, Professor Francis Reynolds further expresses the notion that if the undisclosed principal intervenes on a transaction entered into by the agent that is valid in itself, the third party may elect to sue the principal on such a transaction, but need not do so.[7] Evidently, having this wide discretion contradicts the rules of privity of contract, generating inconsistency in the law of agency.

Subsequently, there is little doubt that in such contracts it is a matter of strict common law that the contract is between the agent and the third party and that the rights and the liabilities of the principal are consequences flowing from his fiduciary rights against the agent.[8] It should be further clarified that the plain truth ought never to be forgotten: that the whole law as to the rights and liabilities of an undisclosed principal is inconsistent with the elementary doctrines of the law of contract. This is the fact that the right of one person to sue another on a contract that is not really made with the person who is suing is unknown to every other legal system except that of England and America.[9]

Evidently, having this wide discretion contradicts the rules of privity of contract, generating inconsistency in the law of agency.

In the case of Durant, the Court of Appeal’s decision to confirm the proposition that a contract made by a man in his own name, intending it to be on behalf of a third party who has not authorised it, but keeping his intention secret, can be ratified by that third party so as to make himself able to sue or liable to be sued on the contract is said to ‘encompass absolutely no authority in English law’. [10] Lord MacNaughten, however, is of the view that only persons who are parties to a contract, acting either by themselves or by an authorised agent, can sue or be sued on the contract. A stranger cannot enforce the contract, nor can it be enforced against a stranger.[11] A clear imbalance of opinion is highlighted here.

Doubts

The much older case of Armstrong v Stokes (1871-72) LR 7 QB 598 has doubted whether it was originally right to hold that an undisclosed principal is liable to be sued on the contract made by an agent on his behalf, but doubts of this kind come too late. It is established law that, if on the failure of the person with whom alone the vendor believed himself to be contracting, the vendor discovers that in reality there is an undisclosed principal behind them, he is entitled to take advantage of this unexpected godsend.[12] Lord Lloyd provides a simple explanation on the present law:

[A]n undisclosed principal may sue and be sued on a contract made by an agent on his behalf, acting within the scope of his actual authority whilst entering into the contract, the agent must intend to act on the principal’s behalf and as such the agent of an undisclosed principal may also sue and be sued on the contract.

[13]

However, in the case of Siu Yin Kwan v Eastern Insurance Co. Ltd [1994] 2 AC 199, the Privy Council were not at all sympathetic to the insurers of the shipowning company in question, highlighting that insurers wishing to exclude the possibility of a claim being brought by someone other than the person named on the proposal form and policy documents are required to include a statement to this effect in the proposal form.[14] Furthermore, in the case of Watteau v Fenwick [1893] 1 QB 346, although nebulous in the sense that the precise way in which the agent’s authority arose is unclear, has not been overruled in England, but nevertheless highlights the preservation of protecting the third party and as such has generated a more credible and commercially suitable outcome:

[T]he principal is liable for all the acts of the agent which are within the authority usually confided to an agent of that character, notwithstanding limitations, as between the principal and the agent, put upon that authority.

[15]

Final remarks

In conclusion, it appears that it is best to regard the doctrine as an anomaly introduced by the common law for reasons of mercantile convenience. The law has to be significantly modified and scrutinised to produce a possible set of rules in order to avoid injustice and uncertainty in commercial cases, as articulated by Lord James of Hereford:

[T]he rule which permits an undisclosed principal to sue and be sued on a contract to which he is not a party, though well settled, is itself an anomaly, and extending it to the case of a person who accepts the benefit of an undisclosed intention of a party to the contract would, in my opinion, be adding another anomaly to the law, and not correcting an anomaly.[16]

[1] A.L Goodhart and C.J Hamson, ‘Undisclosed Principals in Contract’ (1932) 4 CLJ 320

[2] P.F.P Higgins, “The Equity of the Undisclosed Principal” (1965) 28 MLR 167

[3] The leading work on the law of Agency in England is F.M.B Reynolds, Bowstead and Reynolds on Agency (18th edn, Sweet&Maxwell, London: 2006), art 1(1)

[4] F.E Dowrick, ‘The Relationship of the Principal and Agent’ (1954) 17 MLR 24

[5] Tan Cheng-Han, “Undisclosed Principals and contract” (2004) LQR 480, page 485

[6] Ibid, page 489

[7] F.M.B Reynolds, ‘Attornment to agent of undisclosed principal’ (1984) 4 OJLS 434, pg435

[8] Higgins (n2) page 177

[9] Frederic Pollock (1887) 3 LQR 358

[10] Maxstead & Co v Durant [1901] AC 240, page 241

[11] Ibid, page 246

[12] Armstrong v Stokes (1871-72) LR 7 QB 598, page 604

[13] Siu Yin Kwan (Administratrix of the Estate of Chan Ying Lung, Decd.) and Another Appellants v Eastern Insurance Co. Ltd. Respondents [1994] 2 AC 199, page 207

[14] Simon Kneel, ‘Case Comment: Claims by undisclosed principals: Siu Yin Kwan and Another v Eastern Insurance Co Ltd’ (1994) Int ILR 278

[15] Watteau v Fenwick [1893] 1 QB 346, pages 348-349

[16] Durant (n10), page 256