Theoretical Justification

2048 words (8 pages) Essay in Commercial Law

02/02/18 Commercial Law Reference this

Last modified: 02/02/18 Author: Law student

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“The origin of, and theoretical justification for, the doctrine of the undisclosed principal has been the subject of much discussion by academic writers. It seems to be generally accepted that, while the development of this branch of the law may have been anomalous, since it runs counter to fundamental principles of privity of contract, it is justified on grounds of commercial convenience”

– Siu Yin Kwan v. Eastern Insurance Co Ltd [1994] 2 AC 199 (Privy Council), Lord Lloyd

Discuss Critically With Reference To Case Law And Academic Commentary.

In critically discussing the statement made by Lord Lloyd in reaching his judgement in Siu Yin Kwan v. Eastern Insurance Co Ltd, this essay looks to consider the doctrine of the undisclosed principal to then better understand it in the context of the aforementioned quotation. It is first necessary to show an understanding of the law of agency from which the doctrine of the undisclosed principal is derived so as to then better understand the relationship it seeks to impact upon. Then, this essay will consider whether, despite its running counter to the fundamental principles of privity of contract that will also be explained, the doctrine of the undisclosed principal is still justified for there to be commercial convenience. Finally, this essay will conclude with a summary of the key points derived from this discussion regarding Lord Lloyd’s aforementioned statement on the doctrine of the undisclosed principal.

To begin with, however, to understand the law of agency and the relationship it perpetuates – to then better understand the doctrine of the undisclosed principal – it is interesting to consider Scruttons Ltd v. Midland Silicones Ltd that outlined the ‘agency’ principle. The facts involved Scruttons Ltd shipping crates through a carrier with a limited liability clause of £500 per box when the goods were then damaged because of stevedore negligence under contract with Scruttons Ltd with an exclusion clause that Midland were unaware of. Lord Reid then held in his judgement the stevedores could be covered under the contractual clause through the agency relationship if “the stevedore is intended to be protected by the provisions in it which limit liability, (secondly) the bill of lading makes it clear that the carrier … is also contracting as agent for the stevedore that these provisions should apply … , (thirdly) the carrier has authority from the stevedore to do that … , and (fourthly) that any difficulties about consideration . . . were overcome”. That such a view arose is largely because of the recognised commercial convenience despite the recognition of the rules of privity of contract under English common law.

Nevertheless, there is no set rule regarding the operation of the agency relationship under English law. This is because such a relationship may also be formulated by express agreement and/or by implication or conduct, estoppel, or necessity. In addition, a principal is duty bound to pay their agent their agreed remuneration and also indemnify them against any expenses, liabilities and claims involved with discharging their duties. However, an agent in such an arrangement must still respect their principal’s title and exercise their duties with care and skill. Moreover, it was also recognised in Pole v. Leask “no one can become the agent of another person except by the will of that person”. There were also consensual obligations recognised between the agent and the principal regarding “the fiduciary relationship which exists between two persons”, whilst Professor Fridman has recognised the law of agency is based upon “The relationship which exists between two persons … to affect the principal’s legal position”.

Then, to explain the doctrine of the undisclosed principal, look to consider the following hypothetical situation – if A believes the contract is with B and is unaware B is acting for C; nevertheless, C is still entitled to intervene and enforce the contract. It is important to note the contract is between the agent and a third party; the undisclosed principal, therefore, intervenes in an existing contract. There is no legal requirement that the agency be disclosed, but one might expect that failing to disclose would affect the relationship of the principal and agent with the third party. It may do so, but it may not. On this basis, since nearly every legal theorist who has considered undisclosed agency has concluded the established rules are anomalous, it is perhaps hardly surprising that Lord Lindley said in his judgement in Keighley, Maxsted & Co. v. Durant “If an undisclosed principal exists it is, . . . , extremely convenient that he should be able to sue and be sued as a principal”.

Therefore, the House of Lords held in Keighley, Maxsted & Co. v. Durant a contract made by someone intending to contract on behalf of a third party but without their authority cannot be ratified by the third party to allow them to sue or be sued. This is because where whomever made the contract did not profess to be acting on behalf of the principal there must be the express intention to contract on behalf of the other party and without it there can be no ratification. More recently, however, it was established by Lord Lloyd in Siu Yin Kwan v. Eastern Insurance Co Ltd that “(1) An undisclosed principal may sue and be sued on a contract made . . . on (their) behalf, . . . , (2) . . . , 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, . . . , exclude the principal’s right to sue, and . . . be sued”.

Generally, however, even where there is an undisclosed principal they can still look to ratify a contract to give an agent ‘actual authority’ so long as the agent makes it clear to the third party they intended to contract on behalf of a principal. With this in mind, the appropriate legal doctrine is somewhat unclear in its current scope between estoppel, ‘apparent authority’, implied ‘actual authority’ or inherent agency power to cross-check this understanding with the theory the law of agency has been used by the domestic courts to produce the most efficient way of dealing with any situation. In addition, the domestic courts have also argued that the principal is not important in the vast majority of agreements and that parties to a given contract should not be compelled to take on any terms found to be significantly different to those agreed upon. This is because, for example, Watteau v. Fenwick serves as a particularly strong example of this understanding of the legal position when the agent acted against the express wishes of a principal.

Many academics have discussed the problems concerned with the doctrine of the undisclosed principal that Lord Lloyd alluded to in Siu Yin Kwan v. Eastern Insurance Co Ltd and also recognised it goes against the fundamental principle of contract law. Moreover, the law of agency provides an exception to the rules of privity in the law of contract and the Contracts (Rights of Third Parties) Act 1999 and the Prevention of Corruption Acts 1889 & 1916. This is because the law regarding the recognition of privity of contract provides a given contract is unable to confer rights or impose obligations arising out of its terms on any person or agent except the parties to such an agreement since only the parties to a given contract should have any rights in relation to it. At the same time, however, problems have arisen regarding contracts made for the benefit of third parties unable to enforce the obligations of contracting parties with some decisions arising that have been found to be contrary to the general understanding of the rules of privity of contract. In addition, the courts have previously implied the parties identities in any given contract are irrelevant so the standard of performance may be considered fundamentally flawed since the law’s development has ignored the commercial reality some parties simply do not want to work together.

Therefore, the law of contract has sought to make allowances for personal prejudices because a provision forbidding an undisclosed principal or prevention of assignment is considered valid. Nevertheless, where an agent hides the fact they represent someone else and are acting on their authority as part of the theory of undisclosed agency, either the agent or undisclosed principal could be sued. In addition, the principal is largely estopped from denying the agent’s role. This understanding was then affirmed in Smith v. Hughes where it was recognised, whatever anyone’s intentions may be, where they conduct themselves so another reasonable person would believe they were assenting to the terms proposed by another person as part of a given agreement, they would be as bound as if they had intended to agree with the other terms. However, in Freeman v. Cooke a bankrupt’s false statements regarding who owned certain goods operated as conclusive evidence against bankrupt and plaintiffs who claimed the property was not the bankrupt’s when they said the goods belonged to the bankrupt’s brother, but after the defendant had altered their position by seizing the goods, the bankrupt confessed the goods were his own. Nevertheless, in Union Credit Bank Ltd v. Marsey Docks & Harbour Board it was recognised a party who signed a blank delivery order was estopped from disputing the act of someone they authorised to fill the order.

To conclude, it is clear that where an agent, who was acting within the scope of their actual authority, enters into a contract on behalf of an undisclosed principal, the principal or agent may sue or be sued on the basis of the given contractual agreement. Therefore, the doctrine of the undisclosed principal has largely been justified on the grounds of commercial convenience even in spite of the issues associated with the privity of contract principle under English contract law. This is because, under commercial contracts, it is usually a matter of no importance to the parties whether or not there is an undisclosed principal. Such a view is founded on the fact that the circumstances may arise whereby the doctrine of undisclosed principal may appear to have been contravened but in fact needs to have little or no effect upon commercial contracts.


Text Books

‘Halsbury’s Laws of England’ Lexis Nexis, Butterworths (2008)

Koffman. L & MacDonald. E ‘Law of Contract’ 3rd Edition, Tolley Publishing (1998)

Sealy. L. S & Hooley. R. J. A ‘Commercial Law: Text, Cases & Materials’ 3 Edition, Oxford University Press (2003)

Journal Articles

Anon ‘Personal Prejudice & The Doctrine of the Undisclosed Principal’ (1931) (June) 44(8) Harvard Law Review 1271-1275

Busch. D & Macgregor. L ‘Apparent authority in Scots Law: Some International Perspectives’ (2007) 11 Edinburgh Law Review 349-378

Rasmusen. E ‘Agency Law & Contract Formation’ (2004) (1st September) 6 American Law & Economic Review 369

Table Of Cases

Table Of Cases

Birmingham Matinee Club v. McCarty 152 Ala 571 44 So 642 (1907)

Chaudry v. Prahbakar [1988] 3 All ER 718

Comerford v. Brittannic Insurance Co (1908) 24 TLR 593

Darlington Borough Council v. Wiltshier Northern Ltd & Others [1995] 1 WLR 68

Dunlop Tyre Co v. Selfridge [1915] AC 847

Dyster v. Randall & Sons [1926] Ch 932

Freeman v. Cooke (1848) 2 Exch. 654

GN Rwy v. Swaffield (1874) LR 6 Ex 132

Hallock v. State of New York, 64 NY2d 224 [1984]

Keighley, Maxsted & Co. v. Durant [1901] AC 240 (HL)

Pole v. Leask (1863) 33 LJ Ch 155

R v. Gurney (1867) 10 Cox CC 550

Scruttons Ltd v. Midland Silicones Ltd [1962] AC 446

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

Smith v. Hughes (1871) LR 6 QB 597

Summers v. Solomon (1857) 7 E & B 879

The Astyanax [1985] 2 Lloyd’s Rep 109

Union Credit Bank Ltd v. Marsey Docks & Harbour Board [1891] 2 QB 205

Watteau v. Fenwick (1892) 1 QB 346

Table Of Statutes

Contracts (Rights of Third Parties) Act 1999

Prevention of Corruption Act 1889

Prevention of Corruption Act 1916

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