“UNDISCLOSED PRINCIPAL

-A CURIOUS CONCEPT IN AGENCY’

Submitted by

R.GOWTHAM

Reg. No. BA0150017

Under the Guidance of

Ms. DEEPIKA S
Assistant Professor

TAMIL NADU NATIONAL LAW SCHOOL

(A State University established by Act No. 9 of 2012)
Tiruchirappalli
Tamil Nadu – 620 009
SEPTEMBER – 2016
Ms. Deepika S
Assistant Professor in contracts
Tamil Nadu National Law School
Tiruchirappalli
Tamil Nadu – 620 009

CERTIFICATE

This is to certify that the project work entitled “UNDISCLOSED

PRINCIPAL” is a bonafide record of the research work done by R.GOWTHAM, under

my supervision and guidance. It has not been submitted by any other University for the

award of any degree, diploma, associate ship, fellowship or for any other similar

recognition.

Place: Tiruchirappalli

Date:

Signature of the Guide

R. GOWTHAM
Reg. No. BA015017
II – B.A., LLB. (Hons.)
Tamil Nadu National Law School
Tiruchirappalli
Tamil Nadu – 620 009

DECLARATION

I, R.GOWTHAM, do hereby declare that the project entitled “UNDISCLOSED

PRINCIPAL” submitted to Tamil Nadu National Law School in partial fulfilment of

requirement for award of degree in Under Graduate in Law to Tamil Nadu National

Law School, Tiruchirappalli, is my original research work. It and has not been formed

basis for award of any degree or diploma or fellowship or any other title to any other

candidate of any university.

Counter Signed Signature of the Candidate

Project Guide
 ACKNOWLEDGEMENT

At the outset, I take this opportunity to thank my Professor Ms.Deepika S., from

the bottom of my heart who have been of immense help during moments of anxiety and

torpidity while the project was taking its crucial shape.

Secondly, I convey my deepest regards to the Vice Chancellor Arun Roy IAS

and the administrative staff of TNNLS who held the project in high esteem by providing

reliable information in the form of library infrastructure and database connections in

times of need.

Thirdly, the contribution made by my parents and friends by foregoing their

precious time is unforgettable and highly solicited. Their valuable advice and timely

supervision paved the way for the successful completion of this project.

Finally, I thank the Almighty who gave me the courage and stamina to confront

all hurdles during the making of this project. Words aren’t sufficient to acknowledge

the tremendous contributions of various people involved in this project, as I know

‘Words are Poor Comforters’. I once again wholeheartedly and earnestly thank all the

people who were involved directly or indirectly during this project making which

helped me to come out with flying colours.

R.GOWTHAM
 INDEX

INTRODUCTION ……………………………………………………………….6

AGENT AND A PRINCIPAL...............................................................................6

TYPES OF THE PRINCIPAL…………………………………………………..7

UNDISCLOSED PRINCIPAL…………………………………………………..7

RELATIONSHIPS EXISTING BETWEEN THE THREE PARTIES……….8

RIGHTS OF THE UNDISCLOSED PRINCIPAL……………………………..9

LIABILITIES OF THE UNDISCLOSED PRINCIPAL……………………….11

RESEARCH QUESTION………………………………………………………..12

CONCLUSION…………………………………………………………………....15

CRITICAL ANALYSIS…………………….……………………………...16

BIBLIOGRAPHY…………………………………………………………..17
INTRODUCTION:

In civil law cases, “agency” describes situations where one person, the principal, authorizes
a second person, the agent, to deal with a third person on the principal’s behalf. The law of
agency is when an agent is authorized to act on the behalf of the principal and to create a legal
relationship with a third party.

The position of law on agency assumes substantial importance with relaxation of global
investment regulations. Extensive globalization allows firms to acquire assets through agents.
When the principal, third party and the agent are based in different countries there is chance
that they are subject to different laws and therefore are affected differently. The complexity
increases if the Principal is undisclosed. In such cases it is important to determine the liability
of such as a hidden principal in the agency contract.

This paper aims to examine the position of common law on the liabilities of undisclosed
Principal through various case laws taking into consideration that common law forms the basis
of dominant legal systems and international principles in dealing with the matter. The author
submits and clarifies that this is not exhaustive case law compilation but basic compilation with
an aim to clarify the position.

AGENT AND A PRINCIPAL:

An “agent” is a person employed to do any act for another or to represent another

in dealings with the third person. The person for whom such act is done, or who is
represented, is called a “principal”.

-Section 182, ICA, 1872.

In general, if one of the two apparent parties is acting on behalf of other, then that other is
termed as ‘principal’. The party acting on behalf of the said principal is called an ‘agent’ and
the party whom the agent agents contracts is called ‘third party’.

Usually principal is denoted as ‘P’, the agent is referred as ‘A’ and the third party is referred
as ‘T’ or ‘TP’. Principal can be disclosed, unnamed or undisclosed.
TYPES OF THE PRINCIPAL:

In an agency contract, the third party either knows or doesn’t knows the existence of the
principal. Thus by the knowledge of the third party about the principal, it is of three types1:

 Disclosed principal
 Un-named principal
 Undisclosed principal

UNDISCLOSED PRINCIPAL:2

If an agent doesn’t disclose the presence of the principal to the third party and show him as
the principal to the latter, then that principal is known as undisclosed principal.

Undisclosed principal is the one about whom the third party is not aware of. This could be
because:

 The agent represents that he himself or herself is the principal.

 The third party has no reason to believe and there is no declaration by the agent about
this agency.
 Agency is disclosed or implied but the principal remains unnamed. Eg: brokers or
traders.

However when the agent discloses the name of the principal it becomes a case of disclosed
principal, under this the principal will be held liable for the acts of his agent which he has
authorised. But in the case of undisclosed principal the principal is not liable for the actions of
his agent subject to certain exceptions. In this case the third party considers the agent to be
acting on his own will and as a principal.

Therefore an undisclosed principal is one who uses an agent for his or her negotiations with a
third party in which the agent pretends to be acting for himself. As a result the third person
does not even know the existence of the original principal.

1
Avtar Singh, Contract and Specific Relief, (11th edition 2013), Eastern Book Company,Lucknow
2
R.K.Bangia, contracts- +II, Publication Allahabad Law Agency
An agent may not disclose the presence of a principal to the third party because he might be
under express instructions to do so or he may have acted in a careless manner that he himself
forgot to mention it, for some other reasons which binds him not to disclose. In these case the
agent will be held personally liable to the third person. However the third person after
discovering the truth regarding the undisclosed principal may under certain exceptions choose
to hold the principal liable for the actions of the agent.

An undisclosed principal is one whose identity is unknown or not disclosed to the third party,
in this case the third party believes that the agent is the principal acts for his own, therefore in
the eyes of the third person the agent is the principal. The common law recognises the presence
of the undisclosed principal and grants some rights and imposes certain responsibilities on the
undisclosed principal. This proves itself to be an exception in common law rule that only a
party to a contract can sue or can be sued.

RELATIONSHIPS EXISTING BETWEEN THE THREE PARTIES:3

UNDISCLOSED PRINCIPAL AND AGENT:

The rights and duties between the undisclosed principal and the agent are almost the same as
in the case of disclosed principal. The agent is to be treated as a trustee for the undisclosed
principal in the case of any goods or payments obtained or profits derived as a result of the
transaction with the third party. He is also accountable to the undisclosed principal.

UNDISCLOSED PRINCIPAL AND THIRD PARTY:

Prior to enforcement of any kind of rights or liability for any kind of obligation by the
undisclosed principal over the contract apparently made between the agent and the third party
two conditions have to be met,

 The agent must have actual authority whether express or implied to enter into the
contract in question with the third party and ,

3
https://www.jstor.org/stable/785550
  The agent on entering into the contract with the third party must have intended to act
on the behalf of the undisclosed principal, not for his own benefit.

RIGHTS OF THE UNDISCLOSED PRINCIPAL:

‘If an agent makes a contract with a person who neither, knows nor has reason to
suspect, that he is an agent, his principal may require the performance of the
contract; but the other contracting party has, as against the principal, the same right
as he would have had as against if the agent had been the principal.

If the principal discloses himself before the contract is completed, the other
contracting party may refuse to fulfil the contract, if he can show that, if he had
known who the principal in the contract was, or if he had known that the agent was
not a principal, he would not have entered into the contract.’

-Section 231, ICA, 1872.

An undisclosed principal is one whose existence is unknown to the third party in the
contract and the third party believes that the agent is the principal I the contract. The common
law doctrine recognises the existence of the undisclosed principal and grants certain rights and
imposes certain liabilities for obligations on the undisclosed principal. However this is
considered to be in contravention to the common law principal that only a party to the contract
can sue and can be sued. 4

According to the section 231 if an agent makes a contract with a person who neither knows
nor has reason to suspect that he is an agent, his principal may require the performance of a
contract.

The rules governing the right and liabilities pertaining to the relationship between the
undisclosed principal and the third party:

 Generally an undisclosed principal can sue and can be sued by the third party under
the contract subject to certain exceptions.

4
See Section 231, Indian Contract Act, 1872, ‘rights of the parties to a contract made by agent not disclosed’.
 An undisclosed principal remains liable to the third party for the prices of the goods
sold or the services rendered under the contract between the third party and his agent,
made under the agent’s name. The liability of the undisclosed principal is not
discharged even if he makes payment to the agent with instructions to make the
payment to the third party. His liability still exits if the agent fails to make the payment
to the third party as instructed.
 Where the identity of the undisclosed principal is disclosed to the third party and he
is to take action for any amount payable to him under the contract entered then the third
party may either elect the principal or the agent be held liable.
 There are cases wherein which the undisclosed principal may not sue or may not be
sued under the contract made between the agent and the third party under the name of
the agent. A major category is where the identity of the party in a contract is material.
The following are the examples.
1. A promise by the third party to lend money to the agent personally can’t be enforced
by the undisclosed principal.
2. A contract involving a strictly personal skill or service cannot performed by the
undisclosed principal. For example a picture painted by a named artist or a concert
performed by a named musician can’t be performed by the undisclosed, the principal,
as this involves the personal skill and talent of the agent which induces the third party
to enter into a contract with the agent.
3. Where the landlord is induced by the identity credit worthiness and reputation of the
tenant who is in fact to enter into tenancy agreement with him, an undisclosed principal
may not be able to replace the agent as tenant under the tenancy.
4. If the undisclosed principal or agent is aware that the third party will not contract
with the undisclosed principal for whatever reasons, the undisclosed principal cannot
make use of an agent to procure the contract with the third party.
LIABILITIES OF THE UNDISCLOSED PRINCIPAL:5

If the undisclosed principal wants to acquire the performance of the contract then he can
do it subject to the rights and obligations existing between third party and the agent. The right
and liabilities of the third party is protected under section 232 of the Indian contracts act, an
example for the rights provided under the section is given below.

A person ‘A’ who owes 500 rupees to ‘B’ sells 1000 rupees worth of rice to ‘B’. ‘A’ is
acting as the agent on the behalf of ‘C’ in this transaction, but ‘B’ has no knowledge nor
reasonable ground of suspicion that ‘A’ is an agent for ‘C’ in this case. So, ‘c’ cannot compel
‘B’ to take the rice without allowing him to set off ‘A’ debts.

According to section. 231 of ICA, the third party has the rights against the principal as he would
have against the agent if the agent had been the principal. However, if the principal discloses
himself before the contract gets completed, then the other contracting party (Third party) may
refuse to fulfil the contract or would not need to enter into the contract, if he can show that

 He had known the who was the principal in this contract

 He had known that the agent is not the principal

An agent who enter into the contract with the third party without disclosing that he is the agent
and working on behalf on the principal will be considered as the principal by the third party.
Hence, he is liable to the third party or he can sue or get sued by the third party, until the
principal get disclosed. When the existence and identity of the principal is disclosed, the third
party got the right to sue either the principal or the agent. The third party can sue only one of
the two, which means if he sue and obtains judgement against the principal, he cannot sue the
agent, even if he cannot recover any damages from the principal. Likewise, if the undisclosed
principal himself sues the third party or settles with the third party, then the agent cannot sue
the third party under the contract.

In rare instances, T can pursue both A and P, particularly when fraud is perpetrated by A and
P in collision. The general view is that principal is not liable for acts specifically forbidden by
the principal. This is only applicable when it does not amount to a fraud on the third party.

5
http://www.lawctopus.com/academike/rights-liabilities-undisclosed-principal-agency
RESEARCH QUESTIONS:

1. Whether it is originally right to hold that an undisclosed principal is liable to be sued

on the on the contract made by the agent?

Answer: This doubt can be cleared with the help of the case ‘Armstrong vs. strokes’ the
principal was absolved from liability where his agent ran off with money intended for the third
party. Lord Lloyd provides a simple explanation that ‘An 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. 6

The 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.7 The liability of the undisclosed principal extends to
all acts that can, with or without intention, cause the third party to enter into a contract with the
agent. Thus, undisclosed principal is liable for acts that he may have specifically forbidden. In
other words, undisclosed principal is liable for unauthorized acts of the agent, so long as the
third party can reasonably presume such authority existed. The law, thus, goes a long way to
protect the third party, from his acts that may, intentionally or otherwise, defraud the third party
of legitimate benefits.

6
See Armstrong v Stokes (1871-72) LR 7 QB 598
7
See Watteau V Fenwick [1893] 1 QB 346
 2. Whether an undisclosed principal can perpetrate a fraud hiding behind the
doctrine of undisclosed principal.

Answer: If the principal identity is the material element in the formation of the contract and
in such situation if the agent fails to disclose the fact that the contract is made on behalf of the
principal, then he will be prevented from asserting himself that he was a undisclosed
principal.

SAID VS. BUTT

FACTS: The plaintiff wished to attend the first night of the play. He had serious difference
of opinion with the management of the theatre, and he knew that an application for a ticket
in his own name would be refused. He, therefore arranged for a friend to go to the theatre
and buy a ticket for him without disclosing the fact. When he turned up for the performance
and he was refused admission. His claim for damages was dismissed. The Evidence showed
that a first night is a special event with characteristics of its own, and that first night tickets
are only given or sold to persons whom the management selects and wishes to favour.

ARGUMENT: The Case highlights as to whether identity of specific counter party would
have excluded intervention. Arguably if the friend of Mr. Said Had lent his ticket to any
other person, the ticket may have been honoured without hesitation. Thus, Reluctance of
the third party to contract with one single entity has led to exclusion of intervention.
JUDGEMENT: Mc.Cardie found that the purchaser's identity was a material element
in the formation of the contract and that the failure to disclose the fact that the ticket was
bought on his behalf prevented the plaintiff from asserting that he was the undisclosed
principal.
 3. Does the rights of the third party changes with the intervention of the undisclosed
principal?

Answer: No, the rights of the agent doesn’t change even with the intervention of the
principal in a contract where principal is undisclosed, and there is a fair representation of
that agent.

EDMUNDS V. BUSHELL AND JONES, 1865. 226.S

FACTS:
Jones employed Bushell as the manager of his business in London under the name of
‘Bushell & co.’ Jones forbade Bushell from drawing and accepting bills of exchange.
Bushell breached this prohibition in accepting some bills and jones was sued upon one of
them by the plaintiff. The plaintiff nor any previous holder of the bill knew that Bushell was
an agent of jones.

ISSUE:
Is jones can be held liable for the agent’s act?

RATIO:
The plaintiff was liable on this case as others knew that defendant was the agent of
plaintiff.
CONCLUSION:

Undisclosed Principal is a novel concept in the field of contracts. The position of law on agency
assumes paramount importance with the advent of globalisation and mitigating of trade
restrictions between nations and continents. Globalisation, liberalisation and privatisation have
ushered in the era of Modernisation. This has very much facilitated the purchase of assets
through agents. In certain cases the Principal, agent and the third party may reside in different
nations and may be subject to different laws and restrictions. No two countries might have the
same laws. The Principal of Undisclosed Principal often arises in the context of real estate
transactions especially in the cases wherein which the big ticket players are involved. Most of
today’s conglomerates purchase lands for their projects by means of Undisclosed Principal, in
this case they are very much safeguarded from the unnecessary hike in prices which is caused
due to the revelation of the identity of the Undisclosed Principal. The creation of the Disney
world in Florida stands as a perfect example to this case. In this case Disney operated in a
discreet manner concealing its identity as the Principal, working for a period of about eighteen
months they accumulated land spread over 27, 000 acres with the help of agents who acted as
Principals on their behalf. This very much saved Disney a lot of financial troubles. This case
very much explains the importance of the Principal of Undisclosed Principal in today’s modern
world business has become a lot more hassle free and lucrative owing to this concept. Moreover
the ignorance regarding the rights and liabilities exercised by the Undisclosed Principal has
created a lot of controversies.

CRITICAL ANALYSIS:

In the case of the Undisclosed Principal according to ordinary logic and rationale the position
of the Undisclosed Principal should not be the same as the case of Disclosed Principal. But this
is not the case of the legal position it as much the same as in the case of the Disclosed Principal.
This implies that the third party who operates with the knowledge of the existence of the
Principal has the same rights and obligations as that of the third party who operates with full
knowledge of the existence of the Principal. In the case of the Undisclosed Principal in the case
of any claim of action for damages it is under the discretion of the third party to either hold the
agent or the Undisclosed Principal responsible. Although this doctrine has been very much
recognised by the English law, this has been subject to widespread criticism in both the English
legal fraternity and the legal fraternity all around the world where this concept is in use. The
main criticism in this concept is that why is the Undisclosed Principal allowed to sue and to be
sued. Eventhough a lot of theories arose in defence of this practice none of them proved to be
satisfactory. Apart from this criticism the other issue that has been thrown into the limelight
with respect with the concept at hand is that it contradicts the privacy of the contract between
the parties involved in the contract. The ability of the Undisclosed Principal who is not even a
party to the contract to enforce the contract has been the most criticised portion of this concept.

However in the recent times a contradicting opinion has been gaining momentum, the
importance of the Undisclosed Principal with respect to today’s commercial world has been
identified and the contention that this concept is a gross violation of the privacy to the contract
has very much been negated in recent days.

This is very much clearly expressed in the words of legal expert w. Muller:

“The social function of contract at the present day requires the extension of the contractual
‘vinculum Juris’ individual two party relationship must be transformed into a multi-party
relationship, and here undisclosed agency makes a high valuable contribution.”
BIBLIOGRAPHY

REFERENCE BOOKS

1. Avtar Singh, Contract and Specific Relief, (11th edition 2013), Eastern Book Company,
Lucknow
2. Pollock and Mulla : The Indian Contract and Specific Relief Acts, (14th Edition 2013),
Lexis Nexis, New Delhi
3. R.K.Bangia, contracts- II, Publication Allahabad Law Agency

STATUTES CITED:

 Indian Contracts Act, 1872.

WEB SOURCES:

1. http://www.lexisnexis.com/in/legal , Accessed on 21 Sep2016 at 4.00 P.M

2. www.jstor.org’, Accessed on 21 Sep 2016 at 4.30 P.M
3. http://www.lawctopus.com, Accessed on 25 Sep2016 at 4.30 P.M

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