Undisclosed Principal as an Exception to the Rule of Privity

INTRODUCTION

Law of agency is a special type of contract where an agent acts on behalf of the principal.[1] According to S.230 of the Indian Contract Act, 1872 (ICA), agent cannot personally enforce or be bound by contracts, on behalf of principal.[2] But a contract is presumed to exist in a situation where the agent does not disclose his principal. The concept of undisclosed principle is such that the agent while dealing with the third party does not reveal to them the existence of his principle. This implies that the third party considers the agent to be acting for himself, i.e., he is considered to be the principal. Since the identity of the undisclosed principle is not revealed, he should not have any rights or obligations vis-a-vis the third party. However, law imposes certain duties, in case of default and grants certain rights, for enforcement of contract to the undisclosed principle. This is an exception to the general rule of privity of contract, wherein an undisclosed party has certain duties and rights.

Undisclosed Principal and Privity

A third party who negotiates with an agent may not be disclosed that the agent is in fact acting for a principal and not for himself. This may happen if the principal deliberately wants his identity to not be revealed or because the agent chose not to reveal the existence of the principal since he wanted to act in his own name. However, in such a situation law does not impose any duty on the third party to inquire if the contracting party is an agent for another.[3] The law provides for an actual notice that the agent in acting for another.[4] This is to exclude doctrine of undisclosed principal. However, despite the principal being undisclosed at the time of the formation of the contract, such ‘undisclosed principle’ can sue and be sued under the contract, and the agent can also be held personally liable in case of undisclosed principal.[5]

Thus, there is a contract between the undisclosed principal and the agent on one hand and the third party on other hand. The undisclosed principle is being allowed to intervene as a contracting party although his existence was not known to the third party. This doctrine is peculiar and has been criticised as an anomaly because it is counter to the principle of privity of contract[6]. Lord Lindley said in Keighley v Durant that there is an anomaly in holding a person accountable to whom he does not know anything about and did not intend to contract. Thus, this doctrine of undisclosed principal, which enables him to sue was created as a matter of ‘commercial convenience’.[7]

The fundamental principles underlying undisclosed principal

The fundamental principles which underline undisclosed principle have been laid down in Siu Yin Kwan v Eastern Insurance Co Ltd[8], by Lord Lyod of Berwick. The undisclosed principle can sue or may be sued on a contract made by the agent on his behalf. The agent of the undisclosed principal can also sue or be sued on the contract. Moreover, any defense which the third party can have against the agent is available to it against the principal as well. Further, the terms of the contract may, expressly or impliedly, exclude principal’s liability to be sued or is right to sue. Lastly, the contract itself, may show that the agent is the true principal.

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S.231 of the ICA states that the third party has against the undisclosed principal, the same rights which he would have had against the agent had he been the principal. It also grants the third party the right to not fulfil the contract, provided he can show that he would not have entered into the contract, had he known that the agent was not the principal.[9] Moreover, as per S. 232, the undisclosed principal may intervene and require the performance of the contract , but this is subject to all equities that exist between agent and third party.[10]

Thus, as against the agent the principal can derive full benefit of the contract entered by the agent in his own name. He has been granted right to specific performance As against the third party, principal is bound by the equities arising between the agent and the third party.

The undisclosed principal can sue for performance of the contract but this right of the undisclosed principal is subject to the rights of the third party. This right to sue for performance has been granted to him in spite of the fact that the agent had not revealed the existence of the undisclosed principal to the third party. He is allowed to sue even though third party did not know nor had reason to suspect that the person with whom they entered into the contract was an agent. This is because although the contract was not in his name, but in truth the contract is of the undisclosed principal only.

When an agent enters into a contract with the third party in his own name, and he brings a suit for the breach of the same and also obtains a decree, the principal cannot bring another suit against the third party. He could have adopted the contract made by the agent and sued on it, or he could have intervened at any stage in the action which the agent has commenced.[11]

As per S. 231, the second clause provides the third party with the right to repudiate the contract subject to proving that it would not have entered into the contract had it known the agent isn’t the principal. However, this right is available only when the principal himself discloses his existence and the disclosure is not from some other sources.[12] Although once the third party knows the principal and the agent he may choose, as per S. 233 to sue both or either of them.[13]

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While the undisclosed principal may be getting the privilege, going beyond the rule of privity but the third party is given all protection under this doctrine. Rights of all parties are subject to the concessions that the agent might have made to the third party. The undisclosed principal is not allowed to exercise his right to sue causing prejudice to the third party. Since the third party had dealt with the agent, it shall be put in the same position as if it were dealing with the real principal, it shall be allowed to have the same defense against the principal as it had against the agent and shall also have the same right of set off against the principal, as it had against the agent.[14]  Suppose as in Montagu v Forwood[15] , A employed B as his agent to make a contract for him. B employed C as an agent. Now, B is the person who C would suppose to be the principal and not an agent for anyone else. Here, A can make any demand against C only if he is allowed to stand in the same position as if B had in fact been the principal. This is based on the principal of common honesty since the party which duly fulfils its contract with the person he had contracted should not suffer any detriment when the existence of an undisclosed principal is revealed.

Limitations to undisclosed principal’s right to intervene

Right of undisclosed principle to intervene as a contracting party is subject to certain limitations.

Firstly, the undisclosed person cannot intervene if the contract is such that is implies that the agent is the real and the only principal. This would create the concept of agency incompatible with the terms of the contract. In Humble v Hunter, the agent described himself as the real ‘owner’ of the ship and therefore his principal could not intervene nor could he sue.[16] Intervention is excluded where such descriptive words are used where the intervention would clearly be inconsistent with the intent of the contract. [17]

Secondly, intervention by undisclosed principal cannot be allowed where the personality of the agent is important, the contract could have taken place with the agent only and no one else can adopt the contract.[18] Such contracts may include agreement to write a book, or underwrite shares in a company. The third party however may be bound if it elects to accept the performance of such a contract on disclosure of the undisclosed principle, but not otherwise.[19]

Thirdly, intervention is not possible in cases where the personality of the undisclosed principle is of utmost importance to the third party. The third party might not be interested in dealing with a particular person. In such cases like Said v Butt [20], the third party can show that it would have never agreed to contract with the true principal and therefore avoid the intervention of the undisclosed principal.

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Fourthly, undisclosed principle cannot ratify the act of the agent as agent does not act ‘on behalf’ of anybody vis-a vis the third party. The doctrine of undisclosed principle is an anomaly but we cannot extend the anomaly that has been created to grant the right of ratification to the undisclosed principle for the acts of the agent under S.196[21], since the principal was not named or identifiable when the contract was formed. Otherwise, if right of ratification was granted it would become open for any stranger to intervene and sue anytime.[22]

Thus, these limitations ensure that the ambit of this anomaly of undisclosed principal do not keep on extending and are in consistence with the elementary doctrines of the law of contract.

CONCLUSION

If the agent acts on behalf of the principal and enters into a contract with a third party, without revealing the existence of the principal, such principal is undisclosed principal. The S. 231, 232 and 232 provide for the rights and obligations of undisclosed principal even though he is not a party to the relevant contract between the agent and the third party. This doctrine of undisclosed principal is an exception to the rule of privity of contract since even the undisclosed principal has been conferred with the right to sue and be sued under the contract. However, this anomaly comes with its own protection for the third party’s interests under the contract and certain limitations for the undisclosed principal. The rights of the undisclosed principal to demand performance are subject to the rights and interests of the third party.

[1] S.182, Indian Contract Act,1872.

[2] S.230, Indian Contract Act,1872.

[3] Agency, Law and Principles, Roderick Mundey, Oxford University Press,2010.

[4] Greer v Downs Supply Co [1927] 2 KB 28.

[5] Alliance Mills (Lessees) Pvt Ltd v India Cements Ltd AIR 1989 Cal 59.

[6] Pollock (1888) 3 LQR 359.

[7] Siu Yin Kwan v Eastern Insurance Co Ltd [1994] 2 AC 199

[8] Id.

[9] S.231, Indian Contract Act,1872.

[10] S.232, Indian Contract Act,1872.

[11] Godhanram v Jaharamull ILR 40 Cal 335, referred to in Ramaswami v Mukue Karuppan 48 Mad LJ 444.

[12] Kapurji Magniram v Pannaji Devichand AIR 1929 Bom 177.

[13] S.233, Indian Contract Act,1872

[14] Montagu v Forwood [1893] 2 QB 350.

[15] Id.

[16] Humble v Hunter [1848] 12 QB 310.

[17] Siu Yin Kwan v Eastern Insurance Co Ltd [1994] 2 AC 199.

[18] Supra note 7.

[19] Supra note 4.

[20] Said v Butt [1920] 3 KB 497.

[21] S.196, Indian Contract Act,1872.

[22] Keighley, Maxstead & Co v Durant [1901] AC 240.

Author: Sakshi Sharma,
NUJS

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