Undisclosed Agency: Can a Third Party Sue the Principal?

Foundation Business Law
Foundation Business Law
Author Name(s)
Class
Professor
School
The Date

Foundation Business Law 1
Issue
Undisclosed agency, whether a third party who has formed a contract with an agent with
limited authority would be able to sue the principle in undisclosed agency.
Rule of law
The principles of undisclosed principal deals with situations where agents will be acting
on the authority granted by principals, then the agent would execute transactions with the third
parties on the expense of the principals, but the agent will not disclose to the third parties the
concealed relationship with the principal. Generally, when third parties transact with agents, and
the third parties do not know whether the people they are contracting are agents representing
their masters. However, the law allows any of these parties, either third party, the principal, or
the agent to bring a suit to each other independently in case of a breach of the contractual terms.
The authority for this rationale was held in Teheran-Europe Co Ltd v S T Belton (Tractors) Ltd
where the court allowed the principal, Teheran-Europe to sue ST Belton for the defective
compressor. 1 In addition, the case also established that even foreign undisclosed principals can
benefit from this doctrine.2 Despite that, all principals who want to benefit from the doctrine
must disclose themselves before suing for the benefit.
Another rule within this doctrine is that the fact that the principal exists does not
exonerate the agent from the prospects of contractual liability. When a principal has been
disclosed, the third party still retains the authority to sue the agent, but in this time, he may chose
1 Teheran-Europe Co Ltd v S T Belton (Tractors) Ltd (1968) 2 All ER 886.
2 Ibid.

Foundation Business Law 2
to sue the principal.3 In Siu Yin Kwan v Eastern Insurance Co Lord Lloyd stated the legal
requirements for these principles to apply.4 For (1) the undisclosed principal can commence a
suit or be sued for the liabilities flowing from the contract formed between the third party and the
agent who was acting on his authority.5 This rationale was explained in the case of Keighley
Maxted and Co. v. Durant that the rule will only apply to agents who act within the awarded by
their principal.6 Other elements as advised by Lord Lloyd are that the agent must intend to bind
the undisclosed principal with the third party during the formation of the contract; the third party
is allowed to use the same defence he has on the agent to the principal; the contract can include
terms that prevent the principal from intervening.7
Two exceptions exist for the rules stated above. For one, the doctrine will never apply
where the agent intended to be the owner or the principal. That is, when the agent transacts with
a third-party purporting to be the ‘owner,’ and the third party believes that he/she is transacting
with the ‘owner,’ the third agent is treated as the principal or owner, and the undisclosed owner
cannot come later asserting that there was an agency. The earliest authority for this principle is
the case of Humble v. Hunter where the son of the plaintiff formed a contract with the defendant
purporting to be the owner, later when a dispute arose, the claimant asserted that there was an
agency.8
The second exception is that the doctrine will not apply where the identity, skill, or
reputation of each of the contracting parties is crucial to the contractual arrangements. That is,
where the third party demonstrates that he intended to only contract with the agent, and there is
3 Richard Card, John Murdoch and Sandi Murdoch, Real Estate Management Law (Oxford
University Press, 7th ed, 2011) 224.
4 Siu Yin Kwan v Eastern Insurance Co Ltd (1994) 2 AC 199.
5 Ibid.
6 Keighley Maxsted & Co v Durant & Co [1901] AC 240.
7 Siu Yin Kwan v Eastern Insurance Co Ltd (1994) 2 AC 199 207.
8 Humble V Hunter (1846) 12 QB 310.