3 Agency2

Contents
Introduction 40
31 Relationshipwiththirdparty:disclosedprincipal 41
32 Relationshipwiththirdparty:undisclosedprincipal 45
33 Relationshipbetweenprincipalandagent 49
Refectandreview 53
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Introduction
In this chapter the rights and liabilities of the principal, agent and third party on a contract
made by the agent are discussed in two situations:
where the existence of the agency is disclosed to the third party (disclosed principal/
agent: 3.1)
where the existence of the agency is not disclosed to the third party (undisclosed principal/
agent: 3.2).
The fnal section discusses the relationship between the principal and agent.
Learning outcomes
By the end of this chapter and the relevant readings you should be able to:
explain the rights and obligations owed by the principal and by the agent to the third
party
explain the rights and obligations owed by the third party to the principal and to the
agent
explain the rights and obligations arising between the principal and the agent.

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3.1 Relationshipwiththirdparty:disclosedprincipal
Essential reading
Sealy and Hooley, Chapter 5: Relations with third parties, pp.14757.
3.1.1 Principal-thirdparty
The disclosed principal (or disclosed agency) is where the existence of the principal
is disclosed. The disclosed principal may be named (that is, identifed) or unnamed
(unidentifed).
As has been seen, the general rule is:
whereapersoncontractsasagentforaprincipalthecontractisthecontractoftheprinci-
pal,andnotthatoftheagent;and,primafacie,atcommonlawtheonlypersonwhomay
sueistheprincipal,andtheonlypersonwhocanbesuedistheprincipal.(Montgomerie
vUnited Kingdom Mutual Steamship Association[1891]1QB370,WrightJ;SealyandHooley,
pp.14748).
Lord Scarman preferred a rather different emphasis. His view was that everyone is liable
for their contracts, even where they act for another, unless they can show that this liability
is removed by the law of agency (Yeung Kai Yung v Hong Kong and Shanghai Banking Corpn
[1981] AC 787 at 795; Hooley and Sealy, p.158).
The principal may sue or be sued on the contract with the third party if the agent discloses
the agency and:
acts within actual authority
acts without actual authority and the principal ratifes.
It should be pointed out that the principal may be sued on the contract if the agent acts
within apparent authority, but cannot sue the third party without ratifcation.
In response to a claim by the disclosed principal, the third party can use:
any defence or claim arising from the contract
any defence or claim available against the principal.
A defence or claim available against the agent and unconnected with the contract cannot
be used against the principal.
3.1.2 Principal-thirdparty:payment
In general, payment by the third party to the agent does not constitute payment to the
principal. A third party can only discharge a debt owed to the principal by paying the agent
in a limited number of circumstances (Irvine & Co v Watson & Sons [1880] 5 QBD 414. See
Sealy and Hooley, pp.15053):
if an express or implied term of the contract specifes this method of payment
if the principal is estopped from denying the right of the third party to pay the agent
because such payment was induced by a representation by the principal
if the agent has actual authority from the principal to receive payment
if this method of payment was ratifed by the principal: for example, the third party will be
discharged if payment is made to the agent, who had no authority to receive payment, and
the agent passes that payment to the principal, who accepts it.
These situations may be reversed. For example, in Wyatt v Marquis of Hertford [1802] 3 East
147, the third party gave the agent a receipt for payment and the principal, therefore, paid
the agent. In fact, the agent had made no payment, but it was held that the principal was
not liable to the third party.

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3.1.3 Principal-thirdparty:misrepresentationbytheagent
The principal is liable to the third party for a misrepresentation if:
it was made by an agent acting within their actual or apparent authority or the principal
ratifed, and
the misrepresentation induced the third party to enter into the contract.
This is also the case where the misrepresentation by the agent is fraudulent or negligent
and even if the principal was unaware of the agents actions, or the agent was acting for
personal beneft and not for the beneft of the principal (Lloyd v Grace, Smith & Co [1912] AC
716). There is no fraudulent misrepresentation where the agent honestly believes the truth
of the statement that turns out to be false and the principal, while knowing the truth, does
not know that the agent is going to make the statement (Armstrong v Strain [1952] 1 KB 232).
An agent does not come within the terms of the Misrepresentation Act, which was
designed to deal with the liability of the contracting parties for pre-contractual representa-
tions. An agent is, therefore, not liable to the third party for the misrepresentation (Resolute
Maritime Inc v Nippon Kaiji Kyokai (The Skopas) [1983] 1 WLR 857).
The agent may be liable for negligent misstatement under Hedley Byrne & Co Ltd v Heller
& Partners Ltd [1964] AC 465), which you studied in tort law, and the principal may also be
liable if the agent acted within actual or apparent authority.
Activity 3.1
A is commissioned to fnd a buyer for a house owned by P. T expresses interest in buying.
A falsely tells T that another person is also interested in the property and that if T pays in
excess of the asking price he would secure it. A also falsely tells T that a tenant is willing
to rent part of the property. Relying on these statements, T enters into a contract to buy.
Advise T, who has now discovered the truth.
3.1.4 Agent-thirdparty:liabilitytothethirdpartyonthecontract
The general rule is that where the agency is disclosed, the principal alone is liable on the
contract. However, the agent may make himself or herself personally liable in addition to
the principal. The onus of proof is on the party alleging that the agent is personally liable
(Vlassopulos (N & T) Ltd v Ney Shipping Ltd: The Santa Carina [1977] 1 Lloyds Rep 478).
WhereAcontractswithBonbehalfofadisclosedprincipalC,thequestionwhetherboth
AandCareliableonthecontractoronlyCdependsontheintentionoftheparties.That
intentionistobegatheredfrom(1)thenatureofthecontract,(2)itstermsand(3)the
surroundingcircumstances...TheintentionforwhichtheCourtlooksisnotthesubjec-
tiveintentionofAorofB.Theirsubjectiveintentionsmaydiffer.Theintentionforwhich
theCourtlooksisanobjectiveintentionofbothparties,basedonwhattworeasonable
businessmenmakingacontractofthatnature,inthosetermsandinthosesurrounding
circumstances,mustbetakentohaveintended.(Bridges & Salmon LtdvThe Swan (Owner)
[1968]1LloydsRep5,BrandonJ;SealyandHooley,pp.16263).
Where someone signs a contract in their own name and without any qualifcation, the
general rule is that they will assume personal liability, unless the contrary can be gathered
from the rest of the document and the surrounding circumstances.
In Universal Steam Navigation Co Ltd v James McKelvie & Co [1923] AC 492 (Sealy and Hooley,
p.16061), the contract was signed as agents. This showed that they did not sign as princi-
pal and, therefore, did not incur personal liability. Signing for another has the same effect.
On the other hand, in The Swan, Brandon J thought that merely adding the word agent or
director would not, normally, relieve the signer of liability (but see Viscount Cave LC and
Lord Sumner in Universal Steam Navigation, Sealy and Hooley, p.160). Care must be taken in
applying these decisions because words used in one contract may have a different meaning
in another contract.
A term rendering the agent personally liable may be implied by the custom of the agents
trade. In Fleet v Murton [1871] LR 7 QB 126, it was held that there was a custom in the
London fruit trade that the agent was personally liable if the name of the principal was not
disclosed.

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Beforecompanyincorporation
A company cannot be bound by contracts entered on its behalf before incorporation
for the simple reason that at that stage it does not exist and it cannot, therefore, make
contracts. For the same reasons the unincorporated company cannot appoint an agent
to act on its behalf. In Kelner v Baxter [1866] LR 2 CP 174, the promoters of a hotel company
contracted for the purchase of wine before the company was incorporated. Upon incor-
poration the company ratifed this action and the wine was drunk. Before payment the
company went into liquidation. The promoters were held personally liable. The company
did not exist and so could not contract.
Under s.36C(1), Companies Act 1985 (inserted by s.130, Companies Act 1989) someone who
purports to make a contract on behalf of a company that has not been formed will be
personally liable. The knowledge of the third party and the intention of the agent are irrel-
evant. All that is required for liability is that the agent purported to sign for the company.
The section is subject to any agreement to the contrary, which has been construed as
operating only if the agents personal liability has been expressly excluded in the contract
(Phonogram Ltd v Lane [1982] QB 938).
Making those who act on behalf of an unincorporated company personally liable may cause
diffculties for promoters who legitimately wish to enter into contracts for example, to
lease premises so that trading can begin immediately upon incorporation. The most obvi-
ous solution is novation where, with the consent of the third party, the contract with the
promoter is substituted by a contract with the company (Re Patent Ivory Manufacturing Co,
Howard v Patent Ivory Manufacturing Co [1888] 38 LR Ch Div 156).
Activity 3.2
a Why could the company not ratify the contract after incorporation in Kelner v Baxter?
b Will Jake be liable in either of the following situations?
i He signs contract as follows: ii He signs another contract as follows:

3.1.5 Agent-thirdparty:mergerandelection
If the agent is personally liable, the third party must choose to sue either the principal or
the agent and having chosen cannot change their mind. If T sues A, but A cannot pay, T
cannot turn to P. The operation of this rule seems harsh and probably does not refect the
expectations of the parties. The reason the parties wished to hold both principal and agent
liable must have been to give the third party alternative actions.
This process of choosing by the third party is called merger or election. Although Scrutton
LJ saw no distinction between them (Debenhams Ltd v Perkins [1925] 133 LT 252; Sealy and
Hooley, pp.15456), there are differences and merger may occur in circumstances where
there can be no election.
Election involves a choice: the third party is aware of the agency and chooses to sue one
party rather than another. Election can only be made by a third party with full knowledge
of the relevant facts. The election must be clear and unequivocal (e.g. obtaining judgment).
Merger involves the idea that the principal and the agent are liable in the alternative so
that if judgment is obtained against one, the other is discharged from liability even if the
judgment is not satisfed (because, for example, the debtor is insolvent). Where the effect
of merger differs from election is that if the third party sues the agent before the agency is
disclosed there cannot be election, but the doctrine of merger may apply so that the third
party cannot later sue the principal.
Professor Reynolds ((1970) 86 LQR 318) has suggested that many of the cases treated as
merger and election could be seen as situations in which the agent contracted as principal.
Whatever the merits of this view, it does serve as a reminder that it is necessary to deter-
mine the contracting parties and whether agency is involved at all.

Go to your study pack and

read Election distributed by
F.M.B. Reynolds.
Go to your study pack and
read Election distributed by
F.M.B. Reynolds.
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3.1.6 Agent-thirdparty:liabilityforbreachofwarrantyofauthority
If the agent acted without actual or apparent authority (and did not act as principal)
and the principal has not ratifed, neither will be liable on the contract with the third
party (although see Watteau v Fenwick, in section 2.7 above). But the agent has impliedly
contracted that authority exists and, therefore, is liable to the third party if it does not.
This warranty of authority does not extend to a promise that the main contract will be
performed.
Liability is strict. It is no defence to show that the misrepresentation was the result of an
honest, but mistaken, belief about the existence or extent of the authority, or that the
agent had no means of knowing that actual authority had ended. In Yonge v Toynbee [1910]
1 KB 215 (Sealy and Hooley, pp.17073), a frm of solicitors was held liable when they acted
for a client without knowing that, subsequent to their appointment as agent, the client had
become insane, which illness automatically terminated their authority to act (but see Drew
v Nunn [1879] 4 QBD 661; Sealy and Hooley, pp.23941).
The agent will not be liable where the third party ought to have known that no warranty
of authority was being given so that the agent was not professing to act as agent, or where
the agent was appointed under a power of attorney and was unaware that it had been
revoked (Powers of Attorney Act 1971, s.5(1)).
Activity 3.3
What knowledge of the termination of authority must the agent have to be liable for
breach of warranty of authority?
3.1.7 Agentsliabilityintort
An agent may be liable in the tort of negligence if they have assumed responsibility to the
third party so as to give rise to a duty of care to a third party and act in a way that breaches
the duty of care and causes loss (Williams v Natural Life Health Foods Ltd [1998] 1 WLR 830).
An agent, who makes a fraudulent misrepresentation, may be personally liable in the tort
of deceit, and here there is no requirement to show that the agent assumed responsibility
to the third party (Sealy and Hooley, p.159).
3.1.8 Agent-thirdparty:agentsrighttosuethirdparty
The agent cannot sue on the contract between the principal and the third party, but
there are exceptions to this general rule: for example, where the parties intend that the
agent shall be able to sue and where an agent, who is liable on a contract because of the
Companies Act 1985, s.36C, may also enforce that contract (Braymist Ltd v Wise Finance Co Ltd
[2002] EWCA Civ 127).
Activity 3.4
a What was the decision in Rayner v Grote [1846] 15 M & W 359 (Sealy and Hooley,
pp.16870)?
b Might the result in that case have been different if there had been no performance and
the agent/principal had sought to enforce the contract, or if the buyer had not discov-
ered the identity of the principal until after delivery?
Summary
Where an agent acts within the scope of their authority, any contract is the contract of the
principal and the agent cannot sue or be sued on it, unless there is a contrary intention.
Neither the principal nor the agent will be liable on a contract made with the third party
where the agent acted without actual or apparent authority and the principal has not
ratifed. However, the third party may be able to bring an action for breach of warranty of
authority by the agent.
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3.2 Relationshipwiththirdparty:undisclosedprincipal
Essential reading
Sealy and Hooley, Chapter 5: Relations with third parties, pp.17693.
3.2.1 Theundisclosedprincipal
This is also known as undisclosed agency. Up to this point, the law of agency in respect of
third parties seems relatively consistent in that it involves representations made by the
principal to the third party, but on entering the realm of undisclosed principals this consist-
ency vanishes. Here the existence of the agency is not disclosed: T believes the contract
is with A and is unaware that A is acting for P; nevertheless, P is entitled to intervene and
enforce the contract. It is important to note that 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.
The doctrine is diffcult to reconcile with the idea that contract rests on agreement be-
tween the parties for here the third party enters a contract only to discover that the other
contractor is merely an agent and that the contract is with someone entirely different. Lord
Lindley suggested that, in the great mass of contracts it is a matter of indifference to either
party whether there is an undisclosed principal or not. (Keighley, Maxsted & Co v Durant
[1901] AC 240; Sealy and Hooley, pp.139, 177).
Lord Lloyd (Siu Yin Kwan v Eastern Insurance Co Ltd [1994] 2 AC 199; Sealy and Hooley,
pp.17677, 18283) summarised the law:
(1)Anundisclosedprincipalmaysueandbesuedonacontractmadebyanagentonhis
behalf,actingwithinthescopeofhisactualauthority.(2)Inenteringintothecontract,
theagentmustintendtoactontheprincipalsbehalf.(3)Theagentofanundisclosed
principalmayalsosueandbesuedonthecontract.(4)Anydefencewhichthethirdparty
mayhaveagainsttheagentisavailableagainsthisprincipal.(5)Thetermsofthecontract
may,expresslyorbyimplication,excludetheprincipalsrighttosue,andhisliabilitytobe
sued.Thecontractitself,orthecircumstancessurroundingthecontract,mayshowthat
theagentisthetrueandonlyprincipal.
Where the agent acts without authority the principal cannot sue or be sued on the con-
tract. Ratifcation by the principal is not possible because the principal is not identifed to
the third party at the time of the act by the agent.
A rule that allows an undisclosed principal to enforce the contract might tempt an agent to
enter the transaction without having the actual authority of a principal, but knowing that it
will not be diffcult to fnd one who is willing to concoct evidence of prior authorisation, in
the unlikely event that it is necessary to produce such evidence.
There may be diffculty in distinguishing between unidentifed (i.e. where the existence
of a principal is disclosed but not their identity) and undisclosed principals. Furthermore,
where the existence of the principal is undisclosed the agent will always appear to contract
as principal and it may be diffcult to determine whether or not the agent has actually
contracted as principal (United Kingdom Mutual Steamship Assurance Association v Nevill
[1887] 19 QBD 11).
Activity 3.5
What did Lord Lloyd (Siu Yin Kwan v Eastern Insurance Co Ltd [1994] 2 AC 199; Sealy and
Hooley, pp.17677, 18283) mean when he justifed the doctrine of the undisclosed principal
by reference to considerations of commercial convenience?

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3.2.2 Excludingtheapplicationofthedoctrine
It may be that the doctrine of the undisclosed principal is excluded by the terms of the
contract. In Humble v Hunter [1848] 12 QB 310, the description in a contract of one party as
owner of a ship excluded the possibility of admitting evidence to show he was merely the
agent for the true owner. Yet, the courts are disinclined to follow this reasoning too far.
If the courts are too ready to construe written contracts as contradicting the right of an
undisclosed principal to intervene, it would undermine the benefcial assumption in com-
mercial cases. (Siu Yin Kwan v Eastern Insurance Co Ltd [1994] 2 AC 199, Lord Lloyd; Sealy and
Hooley, pp.17677, 18283)
Indeed, the decision in Humble v Hunter was limited in Fred Drughorn Ltd v
Rederiaktiebolaget Trans-Atlantic [1919] AC 203. The agent signed as charterer, but this did
not preclude intervention in the contract by an undisclosed principal.
If priority is to be given to the commercial convenience of the undisclosed principal
doctrine, then the fact that a written document does not reveal the agency may not be
determinative. Yet, there is a danger in construing the relationship as one of undisclosed
agency since this may be to ignore the reasonable expectations of the third party, who
believed the contract was being made with the person now said to be merely an agent.
In practice, the courts have made it relatively diffcult for the third party by requiring them
to prove a negative. It is assumed that commercial parties are willing to contract with any-
one, unless an expression of unwillingness can be proved (Teheran-Europe Co Ltd v ST Belton
(Tractors) Ltd [1968] 2 QB 545, Diplock LJ). The diffculty of proving this negative can be seen
in Siu Yin Kwan v Eastern Insurance Co Ltd [1994] 2 AC 199; Sealy and Hooley, pp.17677, 182
83). An insurance policy included a term to the effect that benefts under the policy could
not be assigned (that is, they could not be transferred to another party). Nevertheless, the
Privy Council did not think that this prevented the intervention of an undisclosed principal.
Evidence that the third party is unwilling to contract with anyone other than the agent
may be found where the contract involves a personal element, as where the third party
entered into the contract, in part, because of the personal attributes of the agent, such as
their solvency or particular skills.
Diffculty has been caused by cases in which the objection of the third party is to the per-
sonality of the undisclosed principal. In Said v Butt [1920] 3 KB 497, a theatre critic knew the
management of a particular theatre would not sell him a ticket because of articles he had
written. He obtained a ticket through an agent. It was held that the theatre could prevent the
principal from entering the theatre. McCardie J said that the critic could not assert a right as
an undisclosed principal since, as he knew, the theatre was not willing to contract with him.
The case is unusual and seems wrong. The intervention of the principal in the contract was
opposed on the grounds of his personal defects; normally, the issue has been whether the
personal attributes of the agent are such that the principal intends only to deal with them.
The result in Dyster v Randall & Sons [1926] Ch 932 is more satisfactory. Here a developer,
knowing that a landowner would not sell to him, bought through an agent. In the course
of his judgment Lawrence J agreed with much of what had been said by McCardie J,
nevertheless, he ordered specifc performance. He remarked that, mere non-disclosure as
to the person actually entitled to the beneft of a contractdoes not amount to misrepre-
sentation, even though the contracting party knows that, if the disclosure were made, the
other party would not enter into the contract. It would seem that the courts favour this
approach, particularly where commercial parties are involved.
In Nash v Dix [1898] 78 LT 445, it was concluded that the third party had contracted with
someone acting as principal and not as agent. In that case, T did not wish to sell a chapel to
a Roman Catholic committee. X purchased the chapel and resold to the committee. It was
held that X had acted as principal in the purchased from T; indeed the evidence revealed
that he had made a proft on the resale.
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Activity 3.6
Acme Co contracts to buy goods from Ecma Co. The price is agreed at 100. The parties also
agree that Acme can set off against payment a debt of 50 owed to it by Ecma. Mace Co now
seeks to intervene in the contract by arguing that Ecma acted as its agent.
Advise Acme.
3.2.3 Settlementbytheprincipalpayingtheagent
What happens if the agent buys on behalf of an undisclosed principal in a sale and the
principal pays the agent, but the agent fails to pay the third party? In Armstrong v Stokes
[1872] LR 7 QB 598 (Sealy and Hooley, pp.19192), a seller gave credit to A, who sometimes
dealt as principal and sometimes as agent. The seller did not inquire whether on this occa-
sion A was acting as principal or agent. Before the existence of the principal was disclosed
the principal paid the purchase price for the goods to A, but A failed to pay the seller. In an
earlier case on disclosed principals, Heald v Kenworthy [1855] 10 Exch 739, Parke B said,
ifapersonordersanagenttomakeapurchaseforhim,heisboundtoseethattheagent
paysthedebt;andthegivingtheagentmoneyforthatpurposedoesnotamounttopay-
ment,unlesstheagentpaysitaccordinglyIthinkthatthereisnoauthorityforsaying
thatapaymentmadetotheagentprecludesthesellerfromrecoveringfromtheprincipal,
unlessitappearsthathehasinducedtheprincipaltobelievethatasettlementhasbeen
madewiththeagent.
In Armstrong, Blackburn J rejected the application of this principle to the undisclosed
principal because it would cause intolerable hardship. He concluded that the seller could
not sue the principal for the debt.
In support of the decision it can be argued that the third party did not have in mind the
creditworthiness of the principal, but only that of the agent. However, this decision has
been subject to a good deal of criticism. It seems wrong that an undisclosed principal
should be in a better position than a disclosed principal, who is only relieved of liability
to the third party if the principal was induced to settle with the agent by a representation
from the third party that the agent had paid the third party.
Various explanations for the Armstrong decision have been advanced.
It was concerned with particular customs among Manchester commission agents (Irvine &
Co v Watson & Sons [1880] 5 QBD 414; Sealy and Hooley, pp.15052), but this does not appear
in the judgment of Blackburn J.
It was a decision about an unidentifed principal (in which case the principal is liable unless
the third party has led the principal to believe the debt has been paid by the agent) and not
an undisclosed principal. But it is clear from his judgment that Blackburn J was dealing with
undisclosed principals.
In Irvine & Co v Watson & Sons (1880) 5 QBD 414 (Sealy and Hooley, pp.15052), the Court of
Appeal distinguished and even doubted Armstrong. Contrary to what Blackburn J actually
said, Brett LJ interpreted the decision narrowly:
Probablytheirdecisionmeansthis,that,whenthesellerdealswiththeagentassoleprin-
cipal,andthenatureoftheagentsbusinessissuchthatthebuyeroughttobelievethat
thesellerhassodealt,insuchacaseitwouldbeunjusttoallowthesellertorecoverfrom
theprincipalafterhepaidtheagent.
The decision is wrong. While the doctrine of the undisclosed principal exists for purposes
of commercial convenience, it is important to maintain protections for the third party. In
the situation where the agent has failed to pass the payment to the third party, either the
principal or the third party will lose and it seems fairest to place the loss on the principal.

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3.2.4 Defencesavailabletothethirdparty
The general rule is that an undisclosed principal can enforce the contract on the same
terms as the agent. This means that the third party can raise those defences that accrued
against the agent up to the point that the principal intervened. The third party can, there-
fore, plead that the debt has been settled by the third party having paid the agent, or can
use set off (that is, the third party can set off a debt owed by the agent to the third party
against the debt on the contract) (Borries v The Imperial Ottoman Bank [1873] LR 9 CP 38).
The third party may, however, only raise such defences where the third party believed the
agent was acting as principal in the transaction. The third party cannot raise these defences
where they were unconcerned as to the party with whom they were contracting (Cooke &
Sons v Eshelby [1887] 12 App Cas 271; Sealy and Hooley, pp.18889). There are some diffcul-
ties with that case. It was said that the defences could only be raised where the principal
was estopped, but this requires some representation by the principal to the third party
and, typically, the very fact of the principal being undisclosed means there will be no such
representation other than from the agent. It might be better to say that where the third
party was not deceived by the undisclosed principal or had no interest in the identity of the
principal, the third party cannot raise defences that were available against the agent.
Activity 3.7
A, who owes T 1,000, enters into a contract for
the sale of goods to T for 5,000 without disclosing
that they are acting as agent for P.
T is aware that A sometimes contracts as principal
and sometimes as agent, but on this occasion
makes no enquiry as to whether A is acting as
agent. Can T set off the debt owed by A?
3.2.6 Mergerandelection
Once the principal is disclosed they can sue or be
sued, but the third party can elect to hold either
the principal or the agent liable on the contract
(Clarkson, Booker Ltd v Andjel [1964] 2 QB 775; Sealy
and Hooley, pp.18487). The courts look for an
unequivocal act that shows the third party has
elected to proceed against either the principal
or the agent. The institution of proceedings con-
stitutes evidence of an election, but this can be
rebutted. In determining whether there has been
an election, it must be asked if the third party had
full knowledge of the relevant facts.
If judgment is obtained against one of the parties,
this amounts to merger, which precludes later
action against the other party. This is not elec-
tion because the third party may have obtained
judgment in ignorance of the existence of the
principal and, therefore, cannot have elected.
Summary
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 contract. The doctrine of the undisclosed principal has been justifed on the grounds of
commercial convenience, the argument being that in commercial contracts it is usually a
matter of no importance to the parties whether or not there is an undisclosed principal.
Readinglawreports(cases)
The judiciary have chosen to attach great importance to pre-
vious cases of the senior courts (Court of Appeal and House of
Lords). This importance is worked out in practise through the
doctrine of precedent.

This doctrine states that, with very

limited exceptions:
English judges must follow cases decided in superior courts
judges in the Court of Appeal must follow other previous
decisions in the Court of Appeal
in exceptional cases, judges in the House of Lords may
decline to follow their own previous decisions.
It is therefore essential to know what other cases that may be
binding have said.
You must therefore read a lot of cases!
Cases are available from the online library, and you may need
some practice in locating them. You will need your Athens
details for logging in to the databases.
Citations are used throughout your subject guides. They are
the details at the end of references to cases such as these:
Borries v [1995] 2 WLR 1
Cooke & Sons v Eshelby (1887) 12 App Cas 271.
You can, for example, search for these on the Westlaw data-
base by opening the Westlaw, then clicking in Westlaw UK,
enter 12 App Cas 271 in the Find by citation slot, then click
go. When the case frst appears, it will be a summary. For
the full report, click the citation under the heading where
reported.

Readinglawreports(cases)
The judiciary have chosen to attach great importance to pre-
vious cases of the senior courts (Court of Appeal and House of
Lords). This importance is worked out in practise through the
doctrine of precedent.

This doctrine states that, with very

limited exceptions:
English judges must follow cases decided in superior courts
judges in the Court of Appeal must follow other previous
decisions in the Court of Appeal
in exceptional cases, judges in the House of Lords may
decline to follow their own previous decisions.
It is therefore essential to know what other cases that may be
binding have said.
You must therefore read a lot of cases!
Cases are available from the online library, and you may need
some practice in locating them. You will need your Athens
details for logging in to the databases.
Citations are used throughout your subject guides. They are
the details at the end of references to cases such as these:
Borries v [1995] 2 WLR 1
Cooke & Sons v Eshelby (1887) 12 App Cas 271.
You can, for example, search for these on the Westlaw data-
base by opening the Westlaw, then clicking in Westlaw UK,
enter 12 App Cas 271 in the Find by citation slot, then click
go. When the case frst appears, it will be a summary. For
the full report, click the citation under the heading where
reported.

Forfulldetailsonprecedent,see
yourCommon law reasoning and
institutions subjectguide.

Forfulldetailsonprecedent,see
yourCommon law reasoning and
institutions subjectguide.
Go to your study pack
and read Undisclosed
principles in contract by A.L.
Goodhart and C.L. Hamson,
and Practical problems of
the undisclosed principle
doctrine by F.M.B. Reynolds.
Go to your study pack
and read Undisclosed
principles in contract by A.L.
Goodhart and C.L. Hamson,
and Practical problems of
the undisclosed principle
doctrine by F.M.B. Reynolds.
Couurrci~i i~w 3 AcrNcv z r~cr qg
3.3 Relationshipbetweenprincipalandagent
This area was covered in the previous version of this subject guide and is, typically, included
in works on commercial law, but it will not be discussed in any great detail here. The reason
is that this subject guide focuses on transactions involving the sale of goods in the way of
trade. It is concerned with the external relationship between a buyer and seller: that is,
the way an agent connects buyer to seller. As a result, the internal relationship between
principal and agent is not covered in depth, and students will not be expected to have a
detailed knowledge of this area. (Those who wish to do so can read about this area in Sealy
and Hooley, Chapter 5; Bradgate, Chapter 6. See also Tettenborn, A. Principals, sub-agents
and accountability (1999) 115 LQR 655, where Professor Tettenborn discusses the liability of
a sub-agent (someone to whom the agent has delegated) to the principal.)
3.3.1 Dutiesowedbyagenttoprincipal
These can be summarised as follows:
1 DutiesimposedbythetermsoftheagencyagreementThe agent must obey the
principals reasonable instructions and act within actual authority. The agent must perform
their duties with reasonable care and skill.
2 Duty not to delegate without the authority of the principal
3 FiduciarydutiesThe agent is, usually, a fduciary. This requires the agent to perform with
honesty and good faith for the beneft of the principal. Among other things, the agent must
avoid conficts between the interests of different principals for whom the agent is acting,
must not use the agency as a means of furthering the agents own interests and must
render accounts of dealings on behalf of the principal. The precise nature of the fduciary
duties owed by an agent to a principal will depend on the terms of their contractual
relationship. It is possible to narrow the range of duties, although not to remove the core
obligations of honesty and good faith (Armitage v Nurse [1998] Ch. 241; Bristol and West
Building Society v Mothew [1998] Ch 1).
The agents liability for breach of contract or breach of fduciary duty (other than the core
obligations) can be limited or excluded. This exclusion or limitation will not remove li-
ability for fraud and it may be subject to the reasonableness test under the Unfair Contract
Terms Act 1977.
If the agent is a commercial agent within the provisions of the Commercial Agents (Council
Directive) Regulations 1993 (see 3.3.4 below), certain obligations cannot be excluded or
limited (regulations 3 and 5): the obligation to look after the principals interests and act
dutifully and in good faith, and, in particular, the duty to make proper efforts to negoti-
ate transactions, to communicate relevant information and to comply with reasonable
instructions.
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3.3.2 Dutiesowedbyprincipaltoagent
The duties owed to the agent have traditionally been determined by the terms of the
agency contract. The agent has a right:
to the agreed remuneration (if any) where they have undertaken the tasks stipulated in the
agency contract
to be reimbursed for expenses that have been agreed or are reasonable
to be indemnifed against liabilities incurred in performing duties under the agency con-
tract, but not for liabilities (or expenses) incurred when acting in excess of authority, unless
the principal has ratifed.
There is an implied promise that the principal will not undermine the agency contract: e.g.
they will provide a suffcient quantity of goods to keep the agents customers reasonably
satisfed (Turner v Steinhoff UK Furniture Ltd [2006] Eu LR 50 (County Court)).
3.3.3 Terminationoftheagency
The agency will, usually, be terminated by:
completion of the task for which the agent was appointed or the expiry of the period of
time for which the agent was appointed
agreement
revocation by the principal, unless the agency is irrevocable
death, or insanity of the principal or agent
winding-up or dissolution, where the principal or agent is a company
insolvency of the principal or, possibly, the agent.
3.3.4 CommercialAgentsRegulations
The Commercial Agents (Council Directive) Regulations 1993 (as amended) are part of the
broader attempt to harmonise commercial law across the European Union.
Regulation of agent-principal relations is more common in other countries than in the
United Kingdom. In the UK, the focus has been on protecting the principal by placing du-
ties on the agent and by subjecting particular types of agent to statutory regulation (e.g.
under the Financial Services and Markets Act 2000). Elsewhere in Europe, there has been an
awareness of the need to protect the agent. One major concern was that, having built up
business, the agents principal might dispense with their services and deal directly with the
clients. The 1993 regulations seek to provide commercial agents with a degree of protec-
tion similar to that enjoyed by employees.
The regulations cover commercial agents. Under regulation 2(1) a commercial agent is a
self-employed intermediary (including a company, but not an employee of the principal,
nor someone in business as a principal) with a continuing authority to negotiate (see Parks
v Esso Petroleum Co Ltd [2000] Tr LR 232), or to negotiate and conclude, the sale or purchase
of goods on behalf of the principal (see also the schedule to the regulations). Someone
whose agency activities are secondary is not a commercial agent: secondary is defned in
schedules to regulations 2(3)-(4) (see Tamarind International v Eastern Natural Gas [2000]
Eur LR 709). Estate agents are not commercial agents because they merely introduce prin-
cipals and do not negotiate and are not involved in the sale or purchase of goods. Whether
or not someone is a commercial agent depends on the particular circumstances of the
relationship between the parties (see Mercantile International Group plc v Chuan Soon Huat
Industrial Group Ltd [2002] EWCA Civ 288).
The commercial agents duty to the principal is to act dutifully and in good faith (regula-
tion 3). This would seem to mirror the pre-regulation requirements under English law. The
agent is required to comply with the principals reasonable instructions, to make proper
efforts in negotiations on the principals behalf, and to communicate with the principal.

Couurrci~i i~w 3 AcrNcv z r~cr :

The principal is obligated to act dutifully and in good faith towards the agent and must,
in particular, provide documentation and information required for the agent to perform
his or her functions, give reasonable notice of a downturn in business, and keep the agent
informed as to the conclusion (or not) of transactions. In determining the content of the
principals duty of good faith a balance is struck between the interests of the agent and
the business interests of the principal, and to show a breach of the duty of good faith it is
necessary to prove malice or bad faith (Simpson v Grant & Bowman Ltd [2006] Eu LR 933).
Signifcantly, neither the agent nor the principal can contract out of their obligations.
The regulations set out the agents entitlement to remuneration. They also stipulate the
circumstances in which the agency terminates and rights to notice and compensation
and/or indemnity.
Sample examination question
Agatha is appointed by Toytoys Ltd to act as its agent in the purchase of toys, which will be
sold through its shops. Agatha is instructed to obtain the consent of the companys board
of directors before making any purchase above 10,000. Agatha has undertaken various
actions.
i Christie, a toy manufacturer, contacts Agatha offering to sell a consignment of toys.
Christie is in fnancial diffculties and, therefore, offers the toys for 30,000, which
represents a substantial discount on the normal price, but Christie requires an immedi-
ate decision. Agatha says, I dont really have the authority for such a large transaction,
but the board usually backs my opinion on such matters, especially in an emergency
like this. Agatha, therefore, agrees to buy on behalf of Toytoys. The next day, Christie
receives a better offer for the toys from another toy retailer. Christie telephones Agatha
and says he is withdrawing from the deal. That afternoon, the board of directors of
Toytoys decides it wishes to go ahead with the purchase from Christie.
ii Agatha is offered toys for 15,000 by Dan. Dan knows Agatha does not have the author-
ity to conclude the deal and so suggests that she seek such authority from the board of
directors of Toytoys. The next day, Agatha tells Dan that she has been given the neces-
sary authority. The deal is concluded. In fact, the meeting of the board of directors had
been postponed because of illness, and Agatha, who was concerned about the possibil-
ity of losing the deal and convinced that the board would give its approval, had decided
to lie to Dan. The board of directors later decides it does not wish to proceed with the
purchase from Dan.
iii Esmond, who is a toy manufacturer, knows that Agatha works as an agent for several
companies, including Toytoys. Agatha is aware that Esmond has had serious problems in
the past with Toytoys over its alleged failure to pay for goods on time and that because
of this Esmond has made it clear that he does not want to trade with Toytoys. Agatha
enters into a deal with Esmond. Later, Esmond discovers that Agatha is acting as agent
for Toytoys and he refuses to continue with the deal.
Advise Toytoys as to its rights and obligations in relation to Christie, Dan and Esmond.
Adviceonansweringthequestion
The best approach to a problem question is also the most obvious, work through from
frst sentence to last. Too often students ignore this advice and plunge into the middle of a
question.
Identify the factual issues and then the applicable law. Set out and discuss the legal princi-
ples you think are relevant before trying to apply them.
i The key point here is the statement by Agatha that she does not have authority to under-
take the transaction. Moreover, when she says that the board usually backs my opinion,
even if this is true, it amounts to an admission that sometimes the board does not back her
opinion. It would seem, therefore, that when Agatha agrees to buy on behalf of Toytoys
that is not what is happening. Christie is aware that Agatha has no authority to accept an of-
fer and that such acceptance can only be made by the board of directors. If this is the case,
there is no agreement for the board to ratify because ratifcation requires the agent to
purport to act for the principal, which Agatha seems not to be doing. It is worth just noting
r~cr z UNivrrsi:v or LoNooN Ex:rrN~i lrocr~uur
that, in view of the statements about her actual authority, Agatha does not have apparent
authority, implied actual authority and Watteau v Fenwick does not apply, and there is no
agency of necessity. Finally, since the question asks candidates to advise Toytoys as to its
rights and obligations in relation to Christie, discussion of the obligations owed by Agatha
is irrelevant.
ii A good answer would focus on a discussion of the contrasting decisions in First Energy Ltd
v Hungarian International Bank Ltd and Armagas Ltd v Mundogas SA. What is the distinction
between these cases? What did the manager in First Energy have apparent authority to do?
Which of these cases is closer to the facts in the problem? Again, discussion of Agathas
liabilities is not required by the question.
iii Esmond is not aware that Agatha is acting as agent for Toytoys, but has expressed his desire
not to trade with that company. Do not restrict the discussion to Said v Butt. A good answer
would consider whether that decision is the leading authority in light of cases such as
Dyster v Randall & Sons, Nash v Dix, and, in particular, Siu Yin Kwan v Eastern Insurance Co Ltd.
The application of these cases to this situation is made even more likely by the fact that
Esmond showed no interest in asking Agatha for whom she was acting. This assumes that
there is an undisclosed agency. The best students will discuss whether this is an example of
an undisclosed agency or whether it is disclosed agency where the principal is unidentifed
since we are told that Esmond knows Agatha acts as an agent.
Couurrci~i i~w 3 AcrNcv z r~cr _
Refectandreview
Look through the points listed below:
Are you ready to move on to the next chapter?
Ready to move on = I am satisfed that I have suffcient understanding of the principles
outlined in this chapter to enable me to go on to the next chapter.
Need to revise frst = There are one or two areas I am unsure about and need to revise
before I go on to the next chapter.
Need to study again = I found many or all of the principles outlined in this chapter very
diffcult and need to go over them again before I move on.
Tick a box for each topic.
Ready to
move on
Need to
revise frst
Need to
study again
I can explain the rights and obligations owed by the
principal and by the agent to the third party.

I can explain the rights and obligations owed by the

third party to the principal and to the agent.

I can explain the rights and obligations arising

between the principal and the agent.

If you ticked need to revise frst, which sections of the chapter are you going to revise?
Must
revise
Revision
done
3.1 Relationship with third party: disclosed principal
3.2 Relationship with third party: undisclosed principal
3.3 Relationship between principal and agent