An Undisclosed Principal is a person who uses an agent for his or her negotiations and transactions with a third party.
Under the law of contract, Agency is a special type of contract entered into by two or more people, where one-person (agent) acts on behalf of the other (Principle). The agent pretends to be himself or herself. Thus, the third party has no knowledge of the agent’s principal. In other words, we can say that the third party considers the agent to be the principal. As a result, the third-party doesn’t know to look for the real principal in any dispute.
The agent may be held personally liable for his or her actions if he or she does not disclose the nature of the agency (the fact that he is acting on behalf of some other person) and the name of the principal. However, if the agent has disclosed his nature of agency and the identity of the principal to the third party, he, in normal circumstances, won’t be liable for commitments undertaken within his rights or authorised agency.
PROVISIONS UNDER INDIAN LAWS
Common law doctrine on Undisclosed Principal grant some rights and imposes some liabilities on the principal-agent (Undisclosed Principal), notwithstanding that he is not the relevant party to the contract. This doctrine is an exception to the general rule that the party to a contract may sue and be sued. We can illustrate the rules under this doctrine by considering the respective relationships between (i) The principal and the agent, (ii) The principal and the third party, (iii) The agent and the third party.
(i) Undisclosed Principal and Agent
In this relationship, the rights and duties between both of them are same as in a disclosed principal situation. The agent must be treated as a trustee for the principal (Undisclosed Principal) of any goods, payments received or any benefits he received out of the contract with the third party.
(ii) Undisclosed Principal and third party
Two pre-conditions have to be met before the undisclosed principal can be held liable for any obligation in the contract between the agent and the third party:
- The agent must have the actual authority from the principal (whether express or implied) to enter into the contract with the third party; and
- On entering into the contract, the agent must have intended to act on behalf of the undisclosed principal, not for his own benefit.
RIGHTS OF UNDISCLOSED PRINCIPAL
An undisclosed principal is a person whose identity is unknown to the third party to the contract with whom the agent deals with and carries out the negotiations and transactions. In the eyes of the third party, the agent is the principal.
According to the Section 231 of the Indian Contract Act, 1872, if an agent makes a contract with a person who neither knows nor has reason to suspect, that he is an agent, his principle may require the performance of a contract.
Rules governing the rights and liabilities between the undisclosed principal and the third party are as follows:
- Undisclosed Principal remains liable to the third person for the cost of goods and services provided under the contract between the agent and the third party. If the agent fails to pay the third party as per the instructions of the Principal (Undisclosed Principal), in that case, undisclosed principal’s liability will not be discharged.
- Where the identity and existence of the undisclosed principal are known to the third party and where the third party is to take any action for the recovery of the amount payable of goods and services to him as per the contract with the agent, the third party can elect to sue either the undisclosed principal or the agent.
- There are some situations where an undisclosed principal may not sue or be sued by the third party under the contract made between the agent and the third party in the agent’s name. This situation arises where the identity of the party is important or material in the contract. Following are such examples of such cases:
- A promise made by the third party to lend money personally to the agent, cannot be enforced by the undisclosed principal.
- The contract involving personal skill or service, cannot be performed by the undisclosed principal. For example, a dance show which is to be performed by a dancer, or a concert which is to be hosted by a host cannot be done by an undisclosed principal. As the third party enters into the contract on the reputation and skill of the person.
- Where a landlord enters into a tenancy agreement with a person on the identity, creditworthiness and reputation of the tenant (who is in fact an agent), an undisclosed principal may not be able to replace the agent as a tenant under the tenancy.
- The undisclosed principal cannot use the agent to procure the contract with the third party when both of them know or are aware that the third party will not contract with the undisclosed principal for whatever reasons.
LIABILITIES OF PRINCIPAL AGAINST THE THIRD PARTY
In cases where the principal wants the contract to be performed, he can do so only to the rights and liabilities which exist between the third party and the agent.
In the situation where the acting agent on behalf of the undisclosed principal in the contract with the third party without revealing the name of the principal and the third party is ignorant or unknown of the identity of the principal, and enters in the contract with the agent assuming that the agent himself is the principal, the rights of the third party is protected. This is because as he entered in the contract with the agent in good faith without having any idea or knowledge that some other party is also involved in this contract.
According to section 232 of the Indian Contract Act, 1862 states that when the third party enters in the contract with the opposite party, without knowing or suspecting that he is acting as an agent (who is acting on behalf on an undisclosed principal and portrays himself as the principal), then if the undisclosed principal wants the contract to be performed, he can enforce the contract only on the basis of the rights and obligation which is existing between the agent and the third party.
For example – X, who owes 1,000 rupees to Y, sells 1,500 rupees worth of rice to Y. X is acting as an agent for Z in the transaction, but Y has no knowledge nor reasonable ground of suspicion that such is the case. Z cannot compel Y to take the rice without allowing him to set-off X’s debt.
So far as third-person is concerned, according to section 231 of the Indian Contract Act, 1862 the third party will have same rights against the principal as the party would have had against the agent if the agent were the principal. In a case where the identity or existence of the principal (undisclosed principal) is revealed before the contract has been executed, then the third party may refuse to perform his part of the contract, but only if he can satisfactorily show that he had known the identity and existence of the principal, he wouldn’t have entered into the contract. Also, when the identity of the principal becomes known after the contract is executed, the third party may choose either to sue the principal or the agent.
But if the third party chooses any of the parties to sue and fails to recover the damages to that party, he cannot sue the other party subsequently. Also, In the case where the third party is sued by the undisclosed principal or enters into any settlement with the third party, the third party cannot sue the agent subsequently. The law says the fact, that when the rights of the undisclosed principal are in question, he is at an advantage compared to the third party.
The term undisclosed principal relates mainly to the liability of an agent for obligations incurred on behalf of a principal. If the agent does not disclose the nature of his agency (the fact that he acts on behalf of another) and thus does not disclose the name of the principal, the agent may be held personally liable for his actions. If, however, the agent disclosed his agency and the name of the principal (disclosed principal), he will normally not be held liable for commitments undertaken within his authorized agent. A dummy buyer may sometimes have an undisclosed principal.
When the rights of an undisclosed principal are in question then the courts recognize that the undisclosed principal was in a better position to protect himself than the outsider. Therefore, his rights are limited by any defence or claim the defendant third person had against the agent. But this concern for the third party’s plight is not as evident when he is the one trying to assert rights. Because the nature of the transaction was hidden from him at the outset, he had no opportunity to demand the obligation of both principal and agent, as he otherwise might well have done. Yet on his discovery of the true facts the election rule is interposed to prevent his doing the same thing.
Requiring an election of remedies by one dealing with an undisclosed principal ignores the policy considerations which distinguish the undisclosed principal’s obligation from that of the agent. All of them furnish arguments that his liability should not be alternative to the agent’s but available to the third party in addition. Only if it is so available can the latter have any fair assurance, he will be able to satisfy his claim.
An undisclosed principal generally refers to a principal person whose existence is unknown to the third party with whom the agent deals and so, in the eyes of the third party, the agent is the principal. Common law doctrine on undisclosed principals confers rights and imposes liabilities on the undisclosed principal, notwithstanding that he is not made a party to the relevant contract. This doctrine is an exception to the general rule that only a party to a contract may sue and be sued thereon. The rules under this particular doctrine may be illustrated by considering the respective relationships between the principal and the agent, the principal and the third party, and the agent and the third party.
Author: Shivam Bansal,
Intern at Lawportal,
Author: Shivam Bansal,
Symbiosis law School, Noida - 2nd Year/ Law Student