RIGHTS AND LIABILITIES OF AN UNDISCLOSED PRINCIPAL by Shubhangi Singh@lexcliq

Under the Indian contract act the concept of undisclosed principal comes into the picture regarding the rights and obligation of an agent when an agent does not disclose the identity or the name or the existence of the principal. In such situation it becomes really important to understand the rights and liabilities of the principal and the agent.

If the principal is disclosed then the liabilities on the breach of the contract would fall on the shoulder of the principal. Every act of an agent would also make principal liable. But, when the principal is undisclosed, then the agent is the principal and a contracting party for the third party therefore, in such situations the agent would be held responsible for the breach of the contract.

An agent is a person who is employed to do any act for another, or who represents another person in dealings with third persons. The principal for whom such act is done, or who is so represented, is known as a principal”. Now, does this mean that a domestic helper who serves his master with his personal service is an agent or a person who aids another person in the fulfilment of his legal or contractual obligations is an agent?

An agent has a representative capacity to affect the legal relations of the principal with the third person. Basically, the principal authorises the agent to represent him / her for bringing the principal into a contractual relationship with a third person. In P. Krishna Bhatta v Mundila Ganapathi Bhatta, Justice Ramaswamy of Madras HC explained agency. He said an agent for the principal in dealings with third person. When a person is a representative of another person in business negotiations or in creation, modification or termination of contractual obligations between the principal and the third persons, then the mediating party would be called an agent.

RIGHTS AND LIABILITIES OF UNDISCLOSED PRINCIPAL

The rights and liabilities of a principal under contracts made by his agent depends upon whether-

· Agent disclosed the name and existence of the principal

· Agent disclosed the existence of the principal but the name is yet to be disclosed (Unnamed Principal)

· Agent did not disclose both, the name and existence of the principal

Where the principal is disclosed

In such situations, Section 226 of Contract Act would be applicable according to which the acts and contracts made by the agent would have the same legal consequences as if the principal did the acts and he entered into the contract with the third parties.

The Principal has all the rights to sue the contracting party for any breach and vice versa. For instance – ‘C’ pays a sum of Rs10,000 to the agent of ‘B’, where the agent is authorised to take the payment, C is discharged of any liability to the principal.

The duty of agent is to enter into the contract on behalf of the principal, therefore he can neither be sued nor can sue the third party for the breach of the contract.

Unnamed Principal

Here the agent discloses the representative character of the principal but does not disclose the identity or the name of the principal. The contract will be exclusively of the principal, until and unless the agent shows in a form of signature that he/ she personally intend to be liable on the breach of the contract. Even if the against entered into a contract as a broker, but does not disclose who the principal is, agent would still not be personally liable.

Undisclosed Principal

An undisclosed principal is a person who uses an agent to enter into a contract with the third party. Therefore, It seems to the third party that the agent is acting on its own. In other words, the agent neither discloses the representative character nor the existence of the principal. The agent is bound by the contract as he entered in the contract with his name. Therefore, the agent has the right to sue the third party, and the third party can sue the agent. According, to the third-party agent is the principal as the third party does not have any information about the actual principal.

But it does not mean that the principal cannot interfere in the contract. The too has the right to intrude and assert his / her position as an undisclosed party to the contract. Here, the undisclosed principal cannot be held liable

PROVISIONS FOR UNDISCLOSED PRINCIPAL UNDER THE INDIAN LAWS.

Section 231 and 232 of Indian contract act gives us a clue about the rights and liabilities of the undisclosed principal and the contracting party. rights of undisclosed principal to interfere in the contract and to sue the third party is subjected to the qualifications play under section 231 and 232.

Section 231 says 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 says 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.

QUESTIONS

1. Can an undisclosed principal intervene against the express terms of the contract which were entered by the agent with the third party?

An undisclosed principal is not allowed to interfere in any contract if some express or implied provision of the contract does not allow the principal to do so for instance in Humble v Hunter, an agent describe himself in the contract as an owner, proprietor. Such terms of the contract show an intention of the agent to make a personal contract with the contracting party. Consequently, the undisclosed principal was precluded from interfering in the contract.

2. Can the third party repudiate the contract made with his agent?

If principal discloses himself before the performance of the contract, then the third party can repudiate the contract, provided if he proves that he would not have entered into contract if he knew about the principal or the agent was not the principal. Identity of the principal should be so important that if he had known the true facts he would have not entered into the contract.

THIRD PARTY AND UNDISCLOSED PRINCIPAL

· The contracting party has the same rights against the Principal which it would have against the agent had the agent been the principal. Third party can sue the principal

· If the true identity of the undisclosed principal or the agent is revealed in front of the third party, then the third party can choose to sue the principal or the agent to claim the damages. But if the third party loses the case against the chosen defendant, then the third party cannot sue another person.

· If the undisclosed principal wants to enforce his/ her rights in the contract then the following conditions should be satisfied –

1. The principal should have given the expressed or the implied authority to the agent to enter into the contract on behalf of him or her.

2. The motive of the agent to enter into a contract with the third party is for the benefit of the principal and not of his or her own self.

3. The principal could compel for the enforcement of the contract only according to the terms and conditions of the contract to which the agent and the third-party agreed.

Therefore, the principal could not claim for the enforcement of the act which had not been agreed between the agent and the third party in the contract.

Raja Bahadur Shivlal Motilal Vs Birdichand Jivraj, 1917

Here Birdichand is a respondent and Raja is an appellant.

Facts

On June 1913 plaintiff gave money to Bansi Dhar on security of 2000 shares of Specie Bank. After some days the market rate of the shares fell because of which plaintiff called Bansi Dhar to pay the margin.

On 6 October 1913, Bansi Dhar paid a margin of Rs.12,000 with 295 shares. But, On the 29th November 1913, an order was made for the winding-up of the Bank. On the 6th February 1914, the plaintiff filed a suit against Bansi Dhar and asked him Bansidhar was bound to indemnify the plaintiff against all liability in respect of the uncalled amount of capital on the shares pledged. On the 20th February, Bansidhar was adjudicated insolvent. On the 9th June, a decree was passed in plaintiff’s favour for Rs. 82,924 with costs and further interest and the defendant was ordered to indemnify the plaintiff against any calls that might be made by the Official Liquidator on the said 2,000 shares. After this decree had been passed, the plaintiff discovered that Bansidhar had been acting an the agent for the present first defendant.

He filed this suit on the 23rd December 1915 against Birdichand Jivraj and the Official Assignee praying-

(1) that the first defendant might be ordered to pay the said sum of Rs. 82,924 with interest from the 9th June 1914 and the costs of the suit filed against Bansidhar.

(2) That the first defendant might be ordered to pay the said sum of one lakh with interest.

(3) That the first defendant might be ordered to indemnify him in respect of all calls he might be required to pay in respect of the 110 shares.

Issue

The real issue in the case is whether the plaintiff, having sued Bansidhar to judgment in Suit No. 172 of 1914, is entitled to maintain this suit against the first defendant

Held

· It was held by the appeal court that plaintiff is not entitled either to recover from the first defendant the said sum of one lakh or to an indemnity in respect of any amount he may have to pay in respect of the said 110 shares.

· A plaintiff who has a right to sue both an agent and his principal under section 233 of the Contract Act is not competent, after he has sued one of them to judgment, to sue the other in a second suit.

· Section 233 of the Contract Act enacts substantive law, laying down who shall be held liable, and not adjective law, defining the procedure by which the liability may be enforced.

· This section merely creates a joint liability so that judgment may be obtained against both principal and agent

· The illustration to section 233 shows that the words “hold them both liable” mean that the party dealing with the agent can join both the agent and the principal in one suit, and there is no suggestion that if he does so he is only entitled to a decree against one or the other and not against both.

· Section 233 of the Contract Act gives the party dealing with an agent who is personally liable a double form of election. He can choose between suing both principal and agent jointly or electing to sue one of them. So that in any case if he sues one to judgment a suit against the other will be barred. But if he sues both and one consents to judgment that cannot be a bar to his continuing the suit against the other.

RELATIONSHIP BETWEEN THE AGENT AND UNDISCLOSED PRINCIPAL

The relationship between the undisclosed principal and the agent remains similar to the relationship that exist between the disclosed principal and the agent. Even if the principal is undisclosed, then also the agent will be responsible and answerable to the principal. The agent is bound to tell or inform the undisclosed principal about the possible profits, loss, harms and benefits of the contract or the agreement that the agent entered with the third party.

CONCLUSION

The rights of undisclosed principal and agent have been protected by the judiciary and Indian contract act. But some point the right of the third party needs to be protected for instance the third party cannot dissolve the contract even if the agent who entered into the contract with the third party as a principal is not the real principal. Basically, the agent conceived his real identity from the third party. If a breach has been made in the contract and the principal still remains undisclosed, then the third party cannot sue the principal along with the agent for damages, because third party does not have any knowledge about the real principal.

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