Doctrine of Undisclosed Principal Flashcards
What is the Doctrine of Undisclosed Principal?
A person must make a contract for themselves or for an identifiable principal or with the authority of and as agent for an undisclosed principal: Trident General Insurance Co v McNiece Bros (1987) 8 NSWLR 270 at 276.
The doctrine of undisclosed principal applies to the situation where an agent enters into a contract intending to do so on behalf of a particular principal but the principal’s existence (and not merely their identity) is not known to the third party.
In such a case the principal is liable under the contract and can enforce the contract made on their behalf by the agent, provided the agent acted within their actual authority: Keighley, Maxsted & Co v Durant [1901] AC 240.
How is it different to that which applies in a disclosed agency?
The position of the agent is different from that which applies in a disclosed agency.
Unlike disclosed agency, where the agent generally drops out of the picture once the contract has been entered, the agent of an undisclosed principal may also sue and be sued on the contract.
This has been referred to as ‘controversial’: Jasmin Solar Pty Ltd v Trina Solar Pty Ltd [2015] FCA 1453 at [121].
If the agent does sue on the contract, any damages recovered will be held for the principal as the agent is in a fiduciary relationship with the principal: Allen v F O’Hearn & Co [1937] AC 213.
The agent’s right to sue will generally be subsumed by the principal’s right, should the principal choose to intervene on the contract and bring an action in the principal’s own name.
What can a 3rd party do if/when they become aware of the existence & identity of the P?
In relation to the third party, once they become aware of the existence and identity of the principal, they may elect to sue the undisclosed principal instead of the agent: Kendall v Hamilton (1879) 4 App Cas 504.
Why is this considered anomalous with privity and contract law principles?
The undisclosed principal doctrine is widely regarded as anomalous: Keighley at 261.
This is mainly due to the fact that the doctrine seems to contradict traditional notions of how contracts are formed and who is subject to them.
Despite the fact that the third party does not know of the existence of the principal, the undisclosed principal is permitted to intervene on their agent’s contract. This has the effect that the principal acquires rights and liabilities under a contract to which they on the face of it were not a party.
Many attempts have been made to reconcile the undisclosed principal doctrine with the doctrine of privity.
Theories include equating the identity of the agent with the undisclosed principal and reliance on implied contract reasoning; that is, that ordinarily the third party in a commercial contract is willing to treat as a party to the contract anyone on whose behalf the agent may have been authorised to contract.
The doctrine dates back to at least the 18th century and has been said to appear to represent in the last resort a policy decision that the undisclosed principal may intervene in the bankruptcy of their agent, and likewise be held personally liable in such a situation: Goodhart and Hamson, ‘Undisclosed Principals in Contract’ (1931) 4 CLJ 320; Reynolds, ‘Agency: Theory and Practice’ (1978) 94 LQR 224.
Are there limits on the Doctrine of Undisclosed Principal?
The doctrine has certain limits, including, for example, barring the third party from proceeding against the agent or principal, as the case may be, if the third party has already obtained judgment against one of them: Kendall .
This may also apply where the third party has made an irrevocable election to look to one and not the other: Clarkson Booker Ltd v Andjel [1964] 2 QB 775.
Another limit stems from the Humble v Hunter (1848) 12 QB 310 line of cases, which prevent the intervention of the undisclosed principal where they are excluded by the express or implied terms of the contract.
How does the doctrine apply?
The main aspects of the doctrine were summarised by Lord Lloyd in Siu Yin Kwan v Eastern Insurance Co Ltd [1994] 2 AC 199 at 207:
(1) An undisclosed principal may sue and be sued on a contract made by an agent on his behalf, acting within the scope of his actual authority.
(2) In entering into the contract, the agent must intend to act on the principal’s behalf.
(3) The agent of an undisclosed principal may also sue and be sued on the contract.
(4) Any defence which the third party may have against the agent is available against his principal.
(5) The terms of the contract may, expressly or by implication, exclude the principal’s right to sue, and his liability to be sued.
Obviously the principal must first be disclosed before they can sue or be sued on the contract concluded by their agent. Whether the principal will be permitted by parol evidence to prove that they are in fact the true principal is an issue of construction of the contract. If the agent has contracted in such terms so as to indicate that they were the real and only principal then parol evidence may not be admissible: Finzel, Berry & Co v Eastcheap Dried Fruit Co [1962] 1 QB 370 at 375.
As the agent contracts in their own name, until the principal is disclosed and intervenes, the agent may sue and be sued on the contract. The rights and obligations of the agent and principal are therefore not joint but, subject to the superior right of the principal, alternative: Maynegrain Pty Ltd v Compafina Bank [1982] 2 NSWLR 141 at 150.
This principle has been said to have underpinned decisions to the effect that the agent was not entitled to an order giving them a remedy against the other contracting party where that other party was on notice of an extant claim by the undisclosed principal that they sought the same remedy: CFI Rentals Pty Ltd v Roussos [2017] QCA 308 at [15].
That principle was held not to preclude the appeal of the agent in CFI Rentals in circumstances where, after the decision at first instance, the undisclosed principal commenced proceedings against the third party claiming a different remedy (recovery of a debt) from that claimed by the agent (declaration they had an equitable charge over debtor’s property and consequential orders) and without knowledge of the agent’s proceedings. In any event, the principal discontinued the proceedings soon after commencing them and confirmed the authority of the agent to prosecute their proceedings on behalf of the principal, alleviating any arguments that the third party was prejudiced by having to face two sets of proceedings.
