Mason Hayes Solicitors

Critically Analyse the Extent to which the Principles of Undisclosed Agency Undermine the Notion of Privity of Contract

Introduction

Privity of contract “has been a feature of English law since at least the thirteenth century”[1] and is centred around the concept that rights and obligations can only be imposed on the parties to a contract. Although the value of the privity of contract doctrine has weakened due to the development of exceptions to the rule, it is still a prominent part of our law and Viscount Haldane described the principle as “fundamental.”[2] A controversial exception to the rule is undisclosed agency. Unlike disclosed agency, “the third party contracts in the first instance with the agent and not the undisclosed principal”[3] because the third party is unaware of the undisclosed principal’s existence. It is clear when examining the case law that the courts have viewed the contract to exist in this way and so the conflict with privity of contract becomes evident when the undisclosed principal is permitted to intervene in this contract. I will argue that the general principles of undisclosed agency undermine the notion of privity of contract. However, the limitations placed on the undisclosed principal’s ability to intervene reflect an adherence to privity of contract where it may be inequitable to the third party to have him intervene in that contract.

Establishing the Parties to the Contract

To prove the principles of undisclosed agency run counter to the notion of privity of contract, it must be shown that the contract exists between the agent and the third party and not the undisclosed principal and the third party. Cheng- Han claims that “the undisclosed principal is truly a party to the contract”[4] and therefore there is no breach of the privity of contract doctrine. However this approach can be criticised as McKendrick suggests that “the third party is unaware of the undisclosed principal’s existence” so “can have no intention to contract with him.”[5] Lord Macnaghten in Keighley Maxsted v Durant[6] made clear that “civil obligations are not to be created by, or founded upon, undisclosed intentions”[7] and it would be unjust for the third party to be viewed as contractually bound to a principal “whose existence he does not even know.”[8] To argue that “a contract between the third party and principal should be implied”[9] is to ignore that courts have soundly concluded the contract to lie “between the third party and the agent.”[10] Lord James said that it is a “somewhat difficult task”[11] to presume that “a man’s thoughts, unexpressed and unrecorded, can form the basis of a contract”[12] and academics maintain theories that the contract belongs to the principal should “be regarded with caution.”[13] By treating the contract as primarily existing between parties who actually intended to contract with each other, we see how the undisclosed principal’s intervention does show an ignorance of privity of contract principles.

Where the Court will Permit the Intervention of the Undisclosed Principal and Undermine Privity of Contract

The court will permit intervention of the undisclosed principal in the contract where it is irrelevant to the contracting parties who they are contracting with. In Fred Drughorn,[14] the court concluded that the agents were actually contracting on behalf of an undisclosed principal and although the agent had described himself as “charterer,”[15] this did not “designate him as the only person to fill that position.”[16] The justification for allowing an undisclosed principal to intervene was that it was “in accordance with ordinary business and common sense and custom.”[17] The relaxed approach of the court in permitting the agent to contract on behalf of the undisclosed principal and subsequently for “either the agent or the principal (to)… sue” on that contract, reflects how undisclosed agency does undermine privity of contract. Furthermore, the case of Siu Yin Kwan v Eastern Insurance Co[18] underlines the relaxed approach of the court as to when an undisclosed principal can intervene in the contract made between the agent and the third party. The court said that in insurance contracts, “the personality of the parties is not so critical that an undisclosed principal cannot intervene” [19] and went as far as to suggest that there should have been a presumption that the forms “may have been completed by an agent.”[20] Again, Lord Lloyd highlighted that the undisclosed principal was permitted to intervene in the contract between the agent and the third party as it was an “ordinary commercial contract.”[21] If it is an ordinary commercial case with an undisclosed principal behind the acts of the agent, intervention will be permitted because the court should not readily “destroy the beneficial presumption in commercial cases.”[22] It is clear that the notion of privity of contract is undermined where commercial convenience is viewed as the more important circumstance.

Alongside the undisclosed principal’s right to sue and be sued in a contract to which he is not a party, the third party can also use any defences available in the contract with the agent, against the undisclosed principal. The approach to the principle of election in the case of Clarkson Booker v Andjel[23] reflects this, as they took a relaxed view as to whether the third party had elected who he wished to sue. They concluded that in undisclosed agency both the undisclosed principal and the agent are liable to be sued “until the proceedings are taken to judgement or a conclusive election is made.”[24] The plaintiff’s ability to choose who they wished to sue is a fair approach acknowledging that the third party was unaware of the undisclosed principal’s existence at the time of entering the contract. Therefore the right of the third party to decide whether to allow the undisclosed principal to intervene and be liable facilitates the notion that undisclosed agency does undermine privity of contract.

Where the Court will Prevent the Intervention of the Undisclosed Principal and thus Adheres to Privity of Contract

Although the undisclosed principal will be permitted to intervene in the contract between the agent and the third party in circumstances where the court believes the identity of the principal to be irrelevant, they will be prevented where it contradicts the terms of the agreement or in a contract “which could not be vicariously performed.”[25] The exceptions to the general rule that the undisclosed principal can intervene in a contract to which he is not a party, reflect how the court will respect privity of contract where it would be inequitable upon the third party to permit unauthorised intervention.

In Greer v Downs Supply Company,[26] the court found that because the third party did not have actual notice that the agent was acting on behalf of an undisclosed principal, “he cannot be made a party to any contract with the appellant for the sale of goods.”[27] The contract was in existence due to the personal attributes of the agent to the third party, meaning that the undisclosed principal was not permitted to intervene “merely because other enquiries might have disclosed that the appellant was the real vendor.”[28] The fact that the court eluded from any requirement that the third party should enquire as to whether there may be an undisclosed principal in existence reflects how the undisclosed principal intervenes in the contract between the agent and third party and that the court will prevent them from doing so where the personal attributes of the agent are material to the third party. Furthermore, in Rolls Royce Power Engineering[29] the court concluded that the intention of the agent to contract on behalf of the undisclosed principal must be “proved subjectively”[30] and it was crucial for the third party “to be committing itself to collaborate not with any party.”[31] The requirement of the subjective rather than objective intention of the agent reflects how the contract exists between the third party and agent and that the court will respect the privity between them where they only wish to contract with one another due to a personal attribute.

Difficulties arise when the third party does not want the undisclosed principal to intervene in the contract, but the undisclosed principal seeks to obtain rights from the contract regardless. In Said v Butt[32]the court found that the undisclosed principal could not intervene in the contract because of the special characteristics of the opening night of the performance. Although the case has not been overruled, it has been criticised as the reasoning “involves the assumption that the contract is between third party and undisclosed principal”[33]and we have seen how this analysis is problematic. Justice McCardie focussed on whether there was a “binding and subsisting contract” [34]between the Palace Theatre and the undisclosed principal, Said. This ignores that Said was never a party to the contract and that it existed between the theatre and the agent; the question should have been whether Said could intervene in this contract. However in the case of Dyster v Randall and Sons[35] the court distinguished circumstances where the rights obtained in the contract were rights that would be assignable to any other party. They established that the sale of land was an ordinary commercial contract with no special characteristics that could prevent the undisclosed principal from intervening and that it was “an agreement which the defendants would have entered into with any other person.”[36] When examining these contrasting cases we can see a conflict which exists at the heart of the controversy of the undisclosed principal doctrine. Whilst in Said v Butt[37] Justice McCardie struggled to find reasoning as to why the undisclosed principal could not intervene, the court in Dyster v Randall[38] focussed on ensuring commercial ease and accessibility for the parties to a contract. Unless the contract is particularly personal in nature, the importance of privity of contract is overlooked and therefore undermined.

Although in some instances the court will respect privity of contract by preventing the undisclosed principal from intervening, the contemporary approach of the courts appears to be an attempt, as far as possible, to allow the undisclosed principal to intervene in a contract made between the agent and the third party. Justification for undermining privity of contract includes that the undisclosed principal should have the right to intervene as they were “responsible for setting events in train and in that sense is not blameless.”[39] He is not a complete stranger to the contract and by allowing the undisclosed principal to have rights and liabilities under that contract recognises that in the majority of instances, “it is a matter of indifference to either party whether there is an undisclosed principal or not.”[40] Additionally, “it is justified on grounds of commercial convenience”[41] and as Lord Lindley highlights, agency relationships are “common and useful in business transactions”[42] where modern day contracts are often more complex than bilateral agreements.

Conclusion

Mechem describes the principle of undisclosed agency as “doubtless an anomaly, but even so… as well settled as any other rule in the law of agency.”[43] Unlike in disclosed agency where “the principal is not a third party intervening on a contract which he did not make,”[44] undisclosed agency allows the undisclosed principal to possess rights and liabilities under a contract which he is not a party to and where the third party did not have any knowledge of his existence. It is evident that the law on undisclosed agency does undermine the notion of privity of contract, as the undisclosed principal can in certain circumstances, intervene in the contract between the agent and the third party. However the courts will only undermine the rule and allow intervention “upon terms which exclude injustice.”[45]As we have seen this includes where the contract terms suggest there is no undisclosed principal or where the personal nature of the agreement means that the privity between the agent and the third party becomes fundamental to the contract itself. Although the rule is anomalous within the constraints set by the privity of contract doctrine, it is an exception that will continue to have great importance within commercial transactions. The acknowledgement of third party intervention via an undisclosed principal will be “bemoaned by doctrinal purists, but will generally be welcomed by commercial pragmatists.”[46] 

Bibliography

Primary Sources

Cases

  • Clarkson Booker v Andjel [1964] 2 QB 775
  • Dunlop Pneumatic Tyre Co LTD v Selfridge and Co LTD [1915] AC 847
  • Dyster v Randall and Sons [1926] CH 932
  • Fred Drughorn Ltd v Rederiaktiebolaget Transatlantic [1919] AC 203
  • Greer v Downs Supply Company [1927] 2 KB 28
  • Keighley Maxsted and Co v Durant [1901] AC 240
  • Rolls Royce Power Engineering Plc v Ricardo Consulting Engineers Lt,[2003] EWHC 2871 (TCC), [2004] 2 All ER (Comm) 129
  • Said v Butt [1920] 3 KB 497
  • Siu Yin Kwan v Eastern Insurance Co Ltd [1994] 2 AC 199

Secondary Sources

Books

  • M.A et al, Commercial Law: Text, Cases and Materials (5th edn OUP,2017)
  • D, A Historical Introduction to the Law of Obligations (New Edn Oxford University Press, 2001)
  • T, English and European Perspectives on Contract and Commercial Law (1st Edn Hart Publishing 2017)
  • E, Contract Law: Text, Cases and Materials (6th Edn, OUP 2014)
  • F.M.B, Bowstead and Reynolds on Agency (18th Edn, London Sweet and Maxwell 2006)

Journal Articles

  • F.R, ‘The Liability of The Undisclosed Principal’ [2010] Harvard Law Review, vol 23, No 7
  • Goodhart A.L and Hamson C.J, ‘Undisclosed Principals in Contract’ [1932] The Cambridge Law Journal, vol 4, issue 3
  • W.M, ‘The Undisclosed Principal’ [July 1953] The Modern Law Review, vol 16, Issue 3
  • Cheng- Han. T, ‘Undisclosed Principals and Contract’ [July 2004] 120 LQR

[1] David Ibbetson, A Historical Introduction to the Law of Obligations (New Edn Oxford University Press, 2001) page 241

[2] Dunlop Pneumatic Tyre Co LTD v Selfridge and Co LTD [1915] AC 847 at 853 (Viscount Haldane)

[3] MA Clarke et al, Commercial Law: Text, Cases and Materials (5th edn OUP,2017) page 223

[4] Tan Cheng- Han, ‘Undisclosed Principals and Contract’ [2004] LQR 480, at 489

[5] MA Clarke et al, Commercial Law: Text, Cases and Materials (5th edn OUP,2017) page 203

[6] Keighley Maxsted and Co v Durant [1901] AC 240

[7] Ibid page 247

[8] W. Mϋller Freienfels, ‘The Undisclosed Principal’ [1953] The Modern Law Review, vol 16, Issue 3, Page 301

[9] Tan Cheng-Han, ‘Undisclosed Principals and Contract’ [2004] LQR 480, at 508

[10] A.L. Goodhart and C.J. Hamson, ‘Undisclosed Principals in Contract’ [1932] The Cambridge Law Journal, vol 4, issue 3 Page 356

[11] Keighley Maxsted and Co v Durant [1901] AC 240 at 251 (Lord James of Hereford)

[12] Ibid

[13] F.M.B Reynolds, Bowstead and Reynolds on Agency (18th Edn, London Sweet and Maxwell 2006) Page 374

[14] Fred Drughorn Ltd v Rederiaktiebolaget Transatlantic [1919] AC 203

[15] Ibid page 203

[16] Ibid

[17] Ibid page 207

[18] Siu Yin Kwan v Eastern Insurance Co Ltd [1994] 2 AC 199

[19] Ibid page 201

[20] Ibid

[21] Ibid page 208  (Lord Lloyd of Berwick)

[22] Ibid page 209

[23] Clarkson Booker v Andjel [1964] 2 QB 775

[24] Ibid page 781

[25] Ibid page 385

[26] Greer v Downs Supply Company [1927] 2 KB 28

[27]Ibid page 31

[28] Ibid page 37

[29] Rolls Royce Power Engineering Plc v Ricardo Consulting Engineers Ltd, [2003] EWHC 2871 (TCC), [2004] 2 All ER (Comm) 129

[30] Ibid paragraph 52

[31] Ibid paragraph 50

[32] Said v Butt [1920] 3 KB 497

[33]F.M.B Reynolds, Bowstead and Reynolds on Agency (18th Edn, London Sweet and Maxwell 2006) Pages 385-386

[34] Said v Butt [1920] 3 KB 497 page 500

[35] Dyster v Randall and Sons [1926] CH 932

[36] Ibid page 938

[37] Said v Butt [1920] 3 KB 497

[38] Dyster v Randall and Sons [1926] CH 932

[39] Keighley Maxsted and Co v Durant [1901] AC 240 Page 288

[40] Ibid page 262

[41] Siu Yin Kwan v Eastern Insurance (1994) 2 AC 199 at 207

[42] Keighley Maxsted and Co v Durant [1901] AC 240 at page 262

[43] Floyd R. Mechem, ‘The Liability of The Undisclosed Principal’ [2010] Harvard Law Review, Vol 23, No 7 page 515

[44] Ewan McKendrick, Contract Law: Text, Cases and Materials (6th Edn OUP 2014) page 979

[45] Keighley Maxsted and Co v Durant (1901 AC 240) page 262

[46] Thomas Krebs, English and European Perspectives on Contract and Commercial Law (1st Edn, Hart Publishing 2017) page 181

Twitter Facebook

Mason Hayes is authorised & regulated by the Solicitors Regulation Authority. The professional rules relating to solicitors firms including the Code of Conduct can also be accessed on the website of the Solicitors Regulation Authority at www.sra.org.uk code of conduct page. Solicitors Regulation Authority Number: 537318. MASON HAYES Solicitors and MASON HAYES are trading styles of Mason Hayes Limited. Registered in England and Wales. Company Number: 3401175. VAT No: 803 032 486 Copyright © 2014 Mason Hayes.
All rights reserved. Terms & Conditions. Privacy Policy