Undisclosed principal

If An Undisclosed Principal] Exists It Is, To Say The Least, Extremely Convenient That He Should Be Able To Sue And Be Sued As A Principal, And He Is Only Allowed To Do So Upon Terms Which Exclude Injustice” - Keighley, Maxsted & Co. V. Durant [1901] AC 240 (HL), Per Lord Lindley.

Assess The Extent To Which The Law On Undisclosed Agency Reflects This Statement.

In considering the extent to which the law as it relates to undisclosed agency reflects the above statement by Lord Lindley in the case of Keighley, Maxsted & Co. v. Durant, this essay will outline what undisclosed agency is before then evaluating the laws development in this context. Then, it will also be necessary to relate the current law to Lord Lindley's aforementioned statement in the case of Keighley, Maxsted & Co. v. Durant to determine whether it serves to reflect the position in relation to the law on undisclosed agency. Finally, this essay will conclude with a summary of the key points derived from this discussion regarding the extent to which the law regarding undisclosed agency reflects the aforementioned statement made by Lord Lindley.

To begin with, in seeking to explain undisclosed agency it is interesting to look at the following hypothetical situation - if A's agent B seeks to formulate an agreement with C, but A's existence and identity are unknown to C, A is then the 'undisclosed principal'. As a result, since nearly every legal theorist who has considered undisclosed agency in the context of contract theory has concluded the established rules are anomalous, it is perhaps hardly surprising Lord Lindley said in the case of Keighley, Maxsted & Co. v. Durant “If an undisclosed principal] exists it is, to say the least, extremely convenient that he should be able to sue and be sued as a principal, and he is only allowed to do so upon terms which exclude injustice”. Therefore, it was held by the House of Lords, reversing the Court of Appeal's decision, a contract made by someone intending to contract on behalf of a third party but without their authority cannot be ratified by the third party to render them able to sue or liable to be sued. This is where the person who made the contract did not profess to be acting on behalf of the principal there must be on the part of the person acting without authority the express intention to contract on behalf of the other party and without it there can be no ratification of the agreement in the circumstances of a given case.

Generally, the principal involved with any given agency transaction is able to ratify the contract to give the agent 'actual authority' at the time of the contract so long as the agent has looked to make it clear to the third party they intended to contract on behalf of a principal in the circumstances of any given case.6 With this in mind, it was believed the appropriate legal doctrine is not clear between estoppel, 'apparent authority', implied 'actual authority' or inherent agency power in looking to cross-check this understanding with the theory the law of agency has been worked by the domestic courts to produce the most efficient way of dealing with whatever situation arises. In addition, in the context of undisclosed principals in keeping with undisclosed agency the domestic courts have also argued that the principal in such transactions is not important in the vast majority of contractual agreements. Moreover, contracting parties should not be compelled to take on any terms found to be significantly different to those which they had agreed upon. This is because, for example, the decision of the court in Watteau v. Fenwick serves as a particularly strong example of this understanding of the legal position when the agent acted against the express wishes of the principal.

Many academics have discussed the problems concerned with the undisclosed agency rule that Lord Lindley alludes to in his aforementioned statement in Keighley, Maxsted & Co. v. Durant and also recognised that it goes against the fundamental principle of contract law. Moreover, the law of agency now serves as an exception to the rules of privity in the law of contract and has looked to account for the provisions of the Contracts (Rights of Third Parties) Act 1999 and the Prevention of Corruption Acts 1889 & 1916 in this regard. In addition, the Harvard Law Review has also considered the fact the courts infer the identities of the parties to the contract is irrelevant to the standard of performance is fundamentally flawed. This is because the development of the law has ignored the commercial reality some parties simply do not want to work with each other. Therefore, the law of contract has sought to make allowances for personal prejudices because a provision forbidding an undisclosed principal or prevention of assignment is valid.

Nevertheless, where an agent hides the fact they represent someone else and are acting on their authority as part of the theory of undisclosed agency, either the agent or undisclosed principal could be sued in any given case. At the same time, however, it is commonly understood the principal is largely estopped from denying the agent's role so it is immaterial whether they have 'actual authority' or not in the circumstances of any given case that arises. This understanding of the legal position was then affirmed in the case of Smith v. Hughes where it was recognised, whatever anyone's intentions may be, where they conduct themselves so another reasonable person would believe they were assenting to the terms proposed by another as part of a given agreement, they would be as bound as if they had intended to agree with the other terms. At the same time, however, it was recognised in Freeman v. Cooke that a bankrupt's false statements regarding whom owned certain goods operated as conclusive evidence against bankrupt and plaintiffs who claimed the property was not the bankrupt's when they said the goods belonged to the bankrupt's brother, but after the defendant had altered their position by seizing the goods, the bankrupt confessed the goods were his own. Conversely, however, in Union Credit Bank Ltd v. Marsey Docks & Harbour Board where it was recognised that a party who signed a blank delivery order was estopped from disputing the act of someone they had authorised to fill up the order as part of a given agreement.

To conclude, having considered the extent to which the law regarding undisclosed agency reflects the aforementioned statement by Lord Lindley in Keighley, Maxsted & Co. v. Durant, it is clearly difficult to strike an appropriate balance between the rights of all parties within the remit of such transactions where an undisclosed principal is involved. This is because a lot of the matters pertaining to determining whether there is an 'agency relationship' in the circumstances of any given case of an undisclosed principal is down to the reading of the facts as they stand with no absolute rule regarding the situation where a situation of undisclosed agency arises. Such a reading of the undisclosed agency relationship is based on the fact there are problems about where the agency relationship can be ratified so an afflicted party may sue to have their rights recognised. That this understanding has arisen may be considered somewhat detrimental to the fact the interests of third parties are arguably favoured. This is because they cannot be expected to look beyond what is presented to them on the facts in determining whether they are party to a more complex agreement than merely representing and furthering their interests regarding a given transaction in keeping with Lord Lindley's aforementioned view in Keighley, Maxsted & Co. v. Durant.


Text Books

'Halsbury's Laws of England' Lexis Nexis, Butterworths (2008)

L. Koffman & E. MacDonald 'Law of Contract' 3rd Edition, Tolley Publishing (1998)

Journal Articles

Anon 'Personal Prejudice & The Doctrine of the Undisclosed Principal' (1931) (June) 44(8) Harvard Law Review 1271-1275

D. Busch & L. Macgregor 'Apparent authority in Scots Law: Some International Perspectives' (2007) 11 Edinburgh Law Review 349-378

E. Rasmusen 'Agency Law & Contract Formation' (1st September) (2004) 6 American Law & Economic Review 369

Table Of Cases

Birmingham Matinee Club v. McCarty 152 Ala 571 44 So 642 (1907)

Comerford v. Brittannic Insurance Co (1908) 24 TLR 593

Freeman v. Cooke (1848) 2 Exch. 654

Hallock v. State of New York, 64 NY2d 224 [1984]

Keighley, Maxsted & Co. v. Durant [1901] AC 240 (HL)

R v. Gurney (1867) 10 Cox CC 550

Scruttons Ltd v. Midland Silicones Ltd [1962] AC 446

Smith v. Hughes (1871) LR 6 QB 597

The Astyanax [1985] 2 Lloyd's Rep 109

Watteau v. Fenwick (1892) 1 QB 346

Table Of Statutes

Contracts (Rights of Third Parties) Act 1999

Prevention of Corruption Act 1889

Prevention of Corruption Act 1916