Principal & Third Party

Liability of Principal

The principal is party to and is bound by contracts made by his agent with a third party, within the scope of his express or implied authority. The third party can enforce the contract directly against the principal and vice versa.

Where an agent concludes a contract within the scope of his apparent authority, then the third party can enforce it directly against the principal.  In strict terms, the principal cannot enforce the contract against the third party if the agent did not have the principal’s actual authority.  However, the principal may ratify the agent’s actions, in the absence of actual authority, provided that the agent purported to act on his behalf. The principal may thereupon enforce the contract.

Where an agent enters a contract which is outside his actual authority but within his apparent authority, The principal is bound to the third party. The agent may be liable to the principal for breach of contract. Ratification confirms the agent’s authority retrospectively and cures the defect in authority. It waives the breach of authority.

If the contract is outside the agent’s actual, implied and apparent authority and the principal does not ratify the contract, the agent may be personally liable to the third party for breach of his implied warranty of authority.  The agent may also be liable on the contract in a personal capacity. The principal is not liable.


Unidentified Principal I

Few issues arise where the agent acts for a disclosed principal, such as where a director signs a contract for and on behalf of a company.  If the agent has the authority and enters a contract as an agent, the principal is liable on the contract/ transaction. The agent is not liable.

The agency may be disclosed, but the identity of the principal may be undisclosed.  In most cases, the fact that the third party does not object to the agent’s disclosure that he acts as is sufficient to indicate that he is willing to contract with the undisclosed principal and that the agent is not to be liable personally. The third party may know that the agent acts as such, without a specific disclosure of the agency or knowledge of his principal. The third party may be nevertheless content to contract with and rely on the credit of the principal, whoever he may be.

Where the agent has actual authority and enters into a contract with another party intending to do so on behalf of his principal, it does not matter whether he discloses to the other party the identity of the principal, or even that he is contracting on behalf of a principal at all, If the other party is willing to treat as a party to the contract anyone on whose behalf the agent may have been authorised to contract.


Unidentified Principal II

In the case of an ordinary commercial contract, such willingness of the other party may be assumed by the agent unless either the other party manifests his unwillingness or there are other circumstances from which the agent should realise that the other party was not so willing.

In other cases, this may not be the proper inference.  In these cases,  if the agent orders goods or makes a contract, but does not disclose the name or standing of his principal (so that his credit is unknown to the other contracting party) the agent himself is liable to pay for the goods or to otherwise fulfill the contract. The third party may know that the other is only an agent, but the circumstances are such that it is inferred that he looks to the credit and standing of the agent, because he does not know who the principal is.


Undisclosed Agency

Where an agent enters a contract without disclosing that he is acting as an agent, the agency (and not just the principal) is undisclosed.  In this case, the contract is between the agent and third party. The agent is subject to the liabilities created by the contract as if he was principal.

If the agency is later disclosed, the third party may choose to enforce the contract against either the principal or agent.  He may not sue both.  Once he elects to enforce against one party, he may not enforce against the other party.

When an agent makes a contract for the principal without disclosing the agency, the undisclosed principal may be able to enforce the contract provided that it does not affect the other party’s interests. However, there are several limitations, which protect the third party who has contracted with the agent, without knowledge of the agency.


Status of Contract

The origin of, and theoretical justification for, the doctrine of undisclosed principal and undisclosed agency have been the subject of much discussion by academic writers. Although the law may be anomalous, since it runs counter to fundamental principles of privity of contract, the courts appear to accept that it is justifiable on the grounds of commercial convenience.

Many of the same considerations arise in the case of undisclosed principals and undisclosed agency. There must be an existing competent principal. The agent must in fact act as such on his behalf.

In both cases, the putative agent risks personal liability if the principal fails to perform. In the case of an unknown or unidentified principal, the putative agent may avoid liability, only if it can be inferred that the third party was satisfied to contract with the principal whosoever, he might be.
In the case of an undisclosed agency, the putative agent may avoid liability only if the principal performs (and the contract expressly or impliedly permits performance by another), or if the third party elects to pursue the principal only.

Where the principal can intervene and enforce the contract, then he may do so in the same way as the agent, but not otherwise.  If for example, he has personal rights against the third party ,  such as for set off of debt against that party, those rights may not be asserted.


Competent Principal

The contract must have been made in the course of the agent’s actual authority.  Apparent authority is not enough.  There must be a prior agreement in relation to the agent’s authority.

An undisclosed, unknown third party cannot claim to be a principal after the event and ratify the contract.A third party cannot intervene in a contract as an alleged principal after it has been made and claim to take advantage of it.

An undisclosed principal may not enforce a contract, if he did not exist, did not have the contractual capacity or did not consent at the time when the contract was made. If the agent refuses to divulge the name of the principal, the court may is likely to conclude that none exists.

The agent is personally liable where he discloses to the third party that he acts for a principal, but there is in fact, no such a principal. He may also breach his warranty of authority.


Identity Critical

The circumstances may be such that the third party clearly intends to contract with the agent personally. It will usually be a matter of interpretation of the contract, as to whether it is personal to the party to the contract, even if he in fact acts as an agent.

The express or implied terms of the relevant contract may provide or imply that the agent only can perform the contract or have the benefit of it. In this case, an undisclosed principal cannot intervene. The contract will be operative unless it is varied by the disclosure of agency.

The undisclosed principal may be precluded from intervening if the identity of the agent as party is a contractual requirement. The circumstances may imply that the agent has been selected for a personal reason such as his skill, solvency or reputation.Where a contract is for personal services and the identity of the person providing the services is of obvious importance, then an undisclosed principal may not intervene.

The fact that the third party is opposed to contracting with the principal for personal reasons, which are not objectively relevant to performance, is not generally enough to prevent the third-party principal from enforcing the contract. In exceptional circumstances, a principal may be precluded from enforcing a contract where it was readily apparent that the other party would not contract with him.

A third party is not bound to a contract with an unidentified principal if the agent misrepresents the identity of the principal because he knows that the third party would refuse to contract with him. In this case, the principal may not intervene. The third party may enforce the contract or may elect to set it aside on the basis of misrepresentation.


Execution By Agent

A person who signs a legally significant document is presumed to be personally liable.  A person who signs a document or executes a deed is liable as principal unless he states that he signs as agent or in the case of a deed, pursuant to a power of attorney.  Similarly, a person signing a cheque or bill of exchange will be personally liable, unless he clearly signs as an agent.

If the agent has the authority of an identified principal and signs as an agent, he will not usually be liable in a personal capacity.  He may sign as agent on behalf of a disclosed principal, such as where he signs a contract for and on behalf of a company.

Where the agent signs the contract in his own name without disclosing the fact of the agency and the identity his principle, he may be personally liable.  He should therefore clearly state that he signs as an agent and disclose his principal if he wishes to avoid personal liability.

The agent may be liable under the terms of the contract, upon its proper interpretation, regardless of how it is executed.  Where the agent contracts on behalf of both himself and his principal, both will be liable.


Wrongs and Obligations

An agent can make his principal liable for civil wrongs. The existence of the agency will not usually excuse either agent or principal from statutory obligations and civil wrong/torts.  An agent may not hive off civil liability arising from his own wrongs, by purporting to act, or in fact acting for, another.

A principal may not usually avoid legal obligations by appointing an agent. In many cases, the principal may be vicariously liable for the agent’s acts and omissions. Even where the act is outside of the scope of his authority, the principal may be vicariously liable for acts in the course of his employment as agent or within the ostensible scope of his authority.

Liability for the agent’s torts may arise under the general principles of agency. Where a principal authorises an agent to do an act which constitutes a civil wrong, the principal is jointly and severally liable to third-parties who suffer loss and damage, thereby caused. For example, the misrepresentation of either principal or agent binds the principal so that he is liable for the consequences.  This may arise where the principal knows something to be false which the agent believes to be true and vice versa.

Generally, an agent does not make his principal criminally liable unless the principal is liable as an accessory or authorises or connives at the offence or default concerned.  In some cases, the very offence itself may be capable of being committed by or through an agent.  This is specifically provided for in the case of many statutory offences.


References and Sources

Irish Sources

 

Commercial Law, Fidelma White 2nd Ed. Thomson Round Hall, Dublin, 2015.

Commercial Law Michael Forde, 3rd Ed Tottel, Haywards Heath, 2005

UK Sources

 

Principles of the Law of Agency Howard Bennett  2013,

Agency 3e: Law & Principles (3rd Revised Ed)  Munday, Roderick;

Bowstead & Reynolds on Agency, 20th Ed.  Professor Peter G. Watts

The Law of Agency  Friedman