BSL165 Foundations Business Law: Analyzing Agency and Liability

This case study delves into the intricacies of agency law, specifically focusing on undisclosed agency and the liabilities arising from contractual agreements. It analyzes a scenario involving a principal (P), an agent (A), and a third party (TP), examining whether TP can sue P when A, acting beyond their ...Read More

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

Foundation Business Law 1
P, A, and TP
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.

Foundation Business Law 3
proof that the third party would not have refrained from the contract if he had information that
the person he was contracting with was representing somebody (undisclosed principal), the court
will not allow the principal to to be enjoined or to intervene. For instance, in a contract of
employment, an employee under a contract cannot purport to have taken the employment on
behalf of a principal. An authority for this rationale is the case of Said V Butt where a ticket
bought by someone under his name on behalf of another person could not be used to let that
person in.9 The principal cannot intervene where he lacked the capacity to contract.10 For
instance, a corporate maybe unable to ratify a contract where an agent formed a contract before
its existence. The principal cannot intervene where the third party has a solid defense against the
agent.11
Application
On application, it is a fact that the agency relationship between “P” and A fits the
definition above for undisclosed principal. A determination of whether “TP” can sue “P” would
require a test where the elements for the application of the doctrine of undisclosed relationship
discussed above, and the exceptions of the doctrine fit this situation. The first requirement is that
the agent should be acting on his/her authority as maintained in the ruling of Keighley Maxted
and Co. v. Durant.12 On analysis, “A” had actual authority to purchase jewelry but not to exceed
$50,000. Therefore, exceeding $50,000 to buy at $60,000 was not within the scope of her
authority. The fact of this case matches those of the case of Keighley Maxted and Co. v. Durant.13
In this case, K & Co, authorized its agent Roberts, to purchase wheat, Roberts, without any
authority purchased the wheat at a price that exceeded the limit he was given, and hence the K&
9 Said V Butt (1920) 3 KB 497.
10 Lee Roach, Card and James’ Business Law (Oxford University Press, 3rd ed, 2014) 170.
11 Ibid.
12 Keighley Maxsted & Co v Durant & Co [1901] AC 240.
13 Ibid.

Foundation Business Law 4
Co refused to pay. When the defendant sued the claimant for the loss, the court at first ordered
the claimant to pay the loss, but this judgment was reversed upon appeal. Therefore, it can be
concluded that P would not pay TP for the payment as A was not acting within P’s authority.
Conclusion
A was only authorized to purchase the jewelry for a price, not more than $50, 000.
Exceeding this price was outside the authority, and hence “TP” can only sue “A” but not “P”.
(i) What if “A” disclosed the agency relationship with “P”
If “A” disclosed that she was acting as an agent of “P”, the rules that would
have applied would be those of a disclosed agency. In a disclosed agency, a
contract entered between a third party and an agent bind the principal as though it
was formed between that principal and the third party.14 However, this rule may be
differ depending on the authority of the agent. For instance, in actual authority,
the agent is only allowed to work within the given express instructions. An
authority in this rule is the case of in Hely-Hutchinson v. Brayhead Ltd where the
court affirmed that people appointed in positions have actual authority which can
also extend to implied authority.15 In implied actual authority, agents can use their
judgment upon the authority conferred in actual authority.16 In usual authority,
agents use the authority that flows from their position as ruled in Watteau v
Fenwick 17. In apparent authority, the conducts of the principal must be the ones
that make the third-party trust that the said agent has the authority in the
transaction.
14 Mindy Chen-Wishart, Alexander Loke and Stefan Vogenauer, Formation and Third Party
Beneficiaries (Oxford University Press, 1st ed, 2018) 146.
15 Hely-Hutchinson v Brayhead Ltd (1968) 1968 QB 1.
16 Robin Burnett and Vivienne Bath, Law of International Business in Australasia (Federation
Press, 2009) 368.
17 Watteau v Fenwick (1893) 1893 QB 1.

Foundation Business Law 5
On application of the rules of disclosed authority, “P” had actual authority to
contract with $50,000. However, actual authority applies only where the third
party is aware of the limitation of the authority.18 In addition, it could be argued
that A had implied-actual authority to contract with $60,000, but that would
depend on their contractual relationship with “P”. In, either way, “P” would be
liable in disclosed authority since TP has sufficient information on agent’s
limitation
(ii) Could A be liable to TP in the circumstances set out in (i)?
No, where “TP” was not aware of the limitation to not exceeding $50,000, “P”
would be liable. The only way “P” could have avoided liability is making sure
that “TP” was aware of the limitation. Therefore, “A” was not liable to “TP”
because P had not disclosed the limitations to “TP”
(iii) Could “P” sue the “TP” in case “TP” refused to honor the contract with “A”
On application, it would require a test whether the case falls within the rules of
the exceptions of the doctrine of the undisclosed principal. Like as discussed
above, the only the principle cannot intervene if there is an express or implied
intention to exclude him/her (ii) where he lacks capacity (iii) where the third party
shows an intention that he would not have entered into the contract if he was
aware of that the agent was acting on behalf of someone else (iv) the third party
has a defense on the agent.19
Regarding the facts in the scenario of “P”, “A”, and “TP”, none of these is
available from the facts. Therefore, “P” can sue TP” to enforce the contract.
18 Richard A Mann and Barry S Roberts, Essentials of Business Law and the Legal Environment
(Cengage Learning, 12th ed, 2018) 394.
19 Roach, above n 10, 200.

Foundation Business Law 6

Foundation Business Law 7
Bibliography
Burnett, Robin and Vivienne Bath, Law of International Business in Australasia (Federation
Press, 2009)
Card, Richard, John Murdoch and Sandi Murdoch, Real Estate Management Law (Oxford
University Press, 7th ed, 2011)
Chen-Wishart, Mindy, Alexander Loke and Stefan Vogenauer, Formation and Third Party
Beneficiaries (Oxford University Press, 1st ed, 2018)
Mann, Richard A and Barry S Roberts, Essentials of Business Law and the Legal Environment
(Cengage Learning, 12th ed, 2018)
Roach, Lee, Card and James’ Business Law (Oxford University Press, 3rd ed, 2014)
Hely-Hutchinson v Brayhead Ltd (1968) 1968 QB 1
Humble V Hunter (1846) 12 QB 310
Keighley Maxsted & Co v Durant & Co [1901] AC 240
Said V Butt (1920) 3 KB 497
Siu Yin Kwan v Eastern Insurance Co Ltd (1994) 2 AC 199
Teheran-Europe Co Ltd v S T Belton (Tractors) Ltd (1968) 2 All ER 886
Watteau v Fenwick (1893) 1893 QB 1