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Unit 15 - Lecture 2 - Liability of Undisclosed Principal

Here are the key points regarding the rights and liabilities of an undisclosed principal: - An undisclosed principal is one whose existence or identity is not revealed by the agent to the third party. - If the agent does not disclose that they are acting on behalf of a principal, the agent may be personally liable on contracts made with third parties. - However, the undisclosed principal can still choose to intervene and enforce the contract made by their agent. They have the right to require performance from the third party. - The third party's rights are the same against the principal as they would be against the agent if the agent was the disclosed principal. For example, the third party can set off any debts owed by the agent.

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218 views

Unit 15 - Lecture 2 - Liability of Undisclosed Principal

Here are the key points regarding the rights and liabilities of an undisclosed principal: - An undisclosed principal is one whose existence or identity is not revealed by the agent to the third party. - If the agent does not disclose that they are acting on behalf of a principal, the agent may be personally liable on contracts made with third parties. - However, the undisclosed principal can still choose to intervene and enforce the contract made by their agent. They have the right to require performance from the third party. - The third party's rights are the same against the principal as they would be against the agent if the agent was the disclosed principal. For example, the third party can set off any debts owed by the agent.

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Niyati Aiya
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Liability of an Agent

3) Rights and liabilities of undisclosed


principal (Sec. 231)

Dr. Megha Ojha


The Rights and Liabilities of Undisclosed
Principal
The rights and liabilities of a principal under contracts made by his agent
depend upon whether –
a) The principal’s existence and name were disclosed by the agent;
b) The principal’s existence was disclosed but not his name;
c) Neither existence nor name of the principal was disclosed.
Where the principal is disclosed – Where the existence of the principal is disclosed,
Section 226 applies, according to which the agent’s acts and contracts “will have the same
legal consequences as if the contracts had been entered into and the acts done by the
principal in person”.
Example – where the agent is authorized to receive payment, a payment to him discharges the
third party from his liability to the principal.

Unnamed principal – Even where the agent does not disclose the name of the principal,
but discloses his own representative character, the contract will be the contract of the
principal, unless there is something in its form or signature to show that the agent intended to
be personally liable.

Undisclosed principal – The doctrine of undisclosed principal comes into play when the
agent neither discloses the existence of his principal nor his representative character.
3) Rights and liabilities of undisclosed principal

• The term ”Undisclosed Principal” relates mainly to the liability of an agent for
obligations incurred on behalf of a principal.

• If the agent does not disclose the nature of his agency (the fact that he acts on
behalf of another) and thus does not disclose the name of the principal, the agent
may be held personally liable for his actions.

• However, if the agent disclosed his agency and the name of the principal
(disclosed principal), he will normally not be held liable for commitments
undertaken within his authorized agency.
3) Rights and liabilities of undisclosed principal

• J. Thomas (P) Ltd. & Co. v. Bengal Jute Baling (1979) “The agent has
contracted in his own name, he is bound by the contract. He may be sued on it and
he has the right to sue the third party, and the principal is not liable in such a case”.

• But the principal has the right to intervene and assert his position as an undisclosed
party to the contract. The right is protected by the Indian Contract Act Section 232 –
“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………
3) Rights and liabilities of undisclosed principal

Scrimshire v. Alderton (1743)


• Facts – A farmer’s oats were sold by a del credere factor without disclosing the
name or existence of the farmer. The del credere factor become bankrupt. The farmer
discovered the buyer and informed him not to pay the factor. Even so the buyer
paid him.
• Lee CJ was of opinion that the buyer should be responsible to the undisclosed
principal in such case.
• In Indian Contract Act 1872, the rights of the undisclosed principal to intervene and
sue the third party is subject to the Section 231 and Section 232.
3) Rights and liabilities of undisclosed principal
Section 231. Right of parties to a contract made by agent not
disclosed.—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 rights
as he would have had as against the agent if the agent had been 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 was the principal in the contract, or if he had known that the agent was
not a principal, he would not have entered into the contract.
Section 232. Performance of contract with agent supposed to be
principal.—Where one man makes a contract with another, neither knowing nor
having reasonable ground to suspect that the other is an agent, the principal, if he
requires the performance of the contract, can only obtain such performance subject to
the right and obligations subsisting between the agent and the other party to the
contract.

Illustration
A, who owes 500 rupees to B, sells 1,000 rupees worth of rice to B. A is acting as agent for
C in the transaction, but B has no knowledge nor reasonable ground of suspicion that such
is the case. C cannot compel B to take the rice without allowing him to set-off A’s debt.
Rules governing the rights and liabilities between
the undisclosed principal and the third party
1) The third party would have same right against the principal which he would have
against the agent if the agent had been the principal.

2) As per Section 232 “if principal requires the performance of the contract, can only
obtain such performance subject to the right and obligations subsisting between the
agent and the other party to the contract.

3) Because of undisclosed status of the principal, the third party is not put to any
disadvantage situation by the intervention of the principal.
Where the third party does not believe the agent to be a
principal or there are suspicious circumstances
Isaac Cooke vs. Henry Douglas Eshelby (1887)
Facts – L & Co. sold cotton to C in their own names, but on the behalf of undisclosed
principal. C knew that L & Co. were in habit of dealing both for principals and on
their own account and had no belief on the subject whether they made this contract on
their own account or for a principal.

Held – C could not, in an action brought by the principal for the price of cotton, set-
off a debt due from L & Co.
Practice Questions
1) Whether the undisclosed principal liable?

2) What are the rights and liabilities of undisclosed principal ?

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