Liability on contracts made by agents
The rights of a third party to sue on a contract made by an agent differ, depending upon
whether the agency was disclosedorundisclosed.Disclosed agency
Agency is disclosed when the agent indicates that he is acting as an agent, whether or not
the principal for whom he is acting is actually identified.
If an agent makes a contract for a disclosed principal then generally the agent incurs no
liability on the contract. By disclosing that he was acting for a principal, the agent will be
taken to have shown the third party that he did not intend to become personally liable
on the contract. However, an agent who intends to act for a disclosed principal can incur
personal liability if the circumstances do not make it clear to the third party that the agent
was acting as an agent, rather than for himself.Undisclosed agency
Agency is undisclosed if the third party did not know that the agent was acting for a prin-
cipal. In such cases the agent will initially be liable to the third party on the contract. If the
agent had actual authority to make the contract the principal is allowed to intervene and
enforce the contract against the third party, under the doctrine of the undisclosed principal
(Fig. 6.3). Once the principal has revealed himself, the agent will no longer be able to enforce
the contract against the third party. However, both the agent and the principal will now be
liable to the third party on the contract. Where such joint liability arises, the third party can
choose to sue either the agent or the principal on the contract. However, having made an
absolute decision to hold one or other liable on the contract, the third party will not be able
to change his mind and then sue the other.
If the agent did not have actual authority to make the contract, then the doctrine of the
undisclosed principal cannot take effect to allow the principal to enforce the contract
against the third party. The principal cannot even ratify the contract, because ratification is
permissible only where the agent purported to act as an agent. Nor will the doctrine make
the principal liable on the contract. However, the third party might be able to enforce the
contract against the principal, if the unusual conditions set out in Watteau vFenwickare
satisfied.
There are four situations where an undisclosed principal cannot sue on the contract, even
if the agent did have actual authority to make the contract. These situations are as follows:
(i) Where a term of the contract excluded agency.
(ii) Where the third party would have refused to contract with the undisclosed principal,
and the personality of either the principal or the agent was so important that it would
be inappropriate to allow the principal to intervene. (Such cases are very rare.)
(iii) Where the third party made the contract with the agent because he particularly wanted
to contract with the agent personally.
(iv) Where the agent was asked whether he was acting for an undisclosed principal and told
the third party that he was not.
If the principal does enforce the contract against the third party, the third party can use
against the principal any defences which he could have used against the agent.168 Chapter 6Agency