Discuss the rights and liabilities of an undisclosed principal of an agent and the third party to the contract, in case of such undisclosed principal.

Question: Discuss the rights and liabilities of an undisclosed principal of an agent and the third party to the contract, in case of such undisclosed principal. [HJS 1996]

Find the answer to the mains question of the Law of Contract only on Legal Bites. [Discuss the rights and liabilities of an undisclosed principal of an agent and the third party to the contract, in case of such undisclosed principal.]

Answer

In the Contract Law, 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. If, however, 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. A dummy buyer may sometimes have an undisclosed principal.

An undisclosed principle is a person who uses an agent for his/her/its negotiations with a third party, often when the agent pretends to be acting for him/her. As a result, the third party does not know he/she can look to the real principal in any dispute.

If the principal is undisclosed at the time of the transaction, but subsequently discovered, the third person may elect to hold such principal because he is the real party in interest.

Rights of Principal Against Third Party 

According to 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 principle may require the performance of contract.

The rules governing the rights and liabilities between the undisclosed principal and the third party are as follows:

• An undisclosed principal remains liable to a third party for the price of goods sold or services provided under the contract made in the agent’s name with the third party. The undisclosed principal’s liability will not be discharged even if he has made payment to the agent with instruction that the agent pays over the same to the third party, if the agent fails to pay the third party as instructed.
• Where the existence and identity of the principal is disclosed and where the third party is to take action for recovery of any amount payable to him under the contract, the third party can elect to sue either the undisclosed principal, or the agent.
• There are cases when an undisclosed principal may not sue or be sued by the third party under the contract made between the agent in the agent’s name and the third party. A major category is where the identity of the party in a contract is material.

Liabilities of Principal Against Third Party 

If the Principal wants to acquire the performance of contract, he can do so subject to the rights and obligations between the agent and the third person. When the third person is innocent and ignorant, that the agent was acting for a principal, if the principal wants the performance of such contract the rights and the liabilities of the third party is protected. Section 232 contains following provisions in this regard:

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 rights 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.

So far as the third person is concerned, according to section 231 he has, as against the principal, the same rights as he would have had against the agent if the agent had been the principal. If, however, the principal discloses himself before the contract is completed, then the other contracting party may refuse to fulfill 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 contract