Discuss the Position of Undisclosed Principal in the Law of Agency.

Understanding the Concept of Agency

In commercial and legal relationships, many transactions are carried out not personally but through representatives or agents. The Law of Agency, governed by the Indian Contract Act, 1872 (Sections 182–238), allows one person (the agent) to act on behalf of another (the principal) to create legal relationships with third parties.

An important concept under this law is that of the Undisclosed Principal — a situation where the agent acts on behalf of a principal, but without revealing the existence or identity of that principal to the third party. This raises crucial questions: Who is liable on the contract? Can the undisclosed principal enforce the contract? Can the third party hold both the agent and the principal responsible?

This essay discusses the position, rights, and liabilities of an undisclosed principal, along with relevant legal provisions, case laws, and real-life examples, to explain how the Indian law of agency resolves this complex relationship.

Meaning of Undisclosed Principal

An Undisclosed Principal is a person who employs an agent to act on their behalf but whose identity is not revealed to the third party at the time of the contract. The third party believes that the agent is acting on his own behalf.

For example, if A (agent) buys goods from B (third party) on behalf of C (principal) but does not disclose that he is acting for C, then C is an undisclosed principal.

Under Section 230 of the Indian Contract Act, 1872, the general rule is that when an agent contracts for a principal, the agent is not personally liable if he discloses the principal. However, when the principal is undisclosed, the situation changes — the agent may become personally liable, and both the agent and undisclosed principal may acquire certain rights and liabilities under law.

Legal Provisions under the Indian Contract Act, 1872

The concept of an undisclosed principal is primarily dealt with under Sections 230, 231, and 232 of the Indian Contract Act, 1872.

1. Section 230 – Agent Cannot Personally Enforce or Be Bound by Contracts

This section lays down that an agent cannot personally enforce or be bound by contracts made on behalf of his principal unless:

• There is a contract to that effect,
• The agent acts for a foreign principal, or
• The principal is undisclosed.

Therefore, when the agent conceals the identity of the principal, he may be personally liable.

2. Section 231 – Rights of Parties when Principal is Undisclosed

This section provides that:

• When an agent acts for an undisclosed principal, the principal may require the performance of the contract, subject to the rights and obligations existing between the agent and the third party.
• The third party may also hold either the agent or the undisclosed principal liable.

3. Section 232 – Right of the Third Party Against the Undisclosed Principal

When the principal is later discovered, the third party has the option to sue either the agent or the principal, but not both simultaneously. Once the third party elects to hold one liable, he cannot proceed against the other.

Position and Rights of the Undisclosed Principal

The undisclosed principal enjoys certain legal rights even though his identity was not known to the third party at the time of contracting.

1. Right to Enforce the Contract:
   Under Section 231, the undisclosed principal can step in and enforce the contract made by the agent, provided the contract was within the authority of the agent.
2. Right to Claim Benefits:
   The principal is entitled to the benefits arising out of the contract entered by the agent, even though the third party was unaware of his existence.
3. Right Subject to Equities:
   The principal’s rights are, however, subject to all the equities and defences available to the third party against the agent. For example, if the third party has any set-off or counterclaim against the agent, the same can be used against the undisclosed principal.
4. Right to Ratify Acts:
   The undisclosed principal may also ratify the agent’s acts, thereby making the contract binding upon himself, even though his name was not disclosed earlier.

Liabilities of the Undisclosed Principal

While the undisclosed principal can enforce contracts, he also bears certain liabilities:

1. Liability for Agent’s Acts:
   Once the principal discloses himself, he becomes liable for the obligations arising from the agent’s contract.
2. Liability to Third Parties:
   If the third party discovers the principal’s existence, he can choose to hold the principal liable for performance or damages, unless he has already elected to hold the agent liable.
3. Bound by Agent’s Fraud or Misrepresentation:
   According to Section 238, the principal is bound by the fraud or misrepresentation of the agent, if such acts were committed in the course of the agent’s business.
4. No Right to Interfere with Third-Party Equities:
   The principal cannot enforce a contract on terms more favorable than those existing between the agent and the third party at the time of the transaction.

Rights and Liabilities of the Third Party

The third party, once he discovers the principal, has certain legal options:

1. He can sue either the agent or the principal for performance or breach of contract.
2. If the third party has made any payment to the agent before discovering the principal, he is discharged from liability to the principal.
3. However, if the third party was induced into the contract by fraud, he may rescind the contract once the principal’s identity becomes known.

Thus, the law maintains a balance between the rights of the undisclosed principal and the protection of the third party who entered into a contract in good faith.

Judicial Interpretation

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

In this English case, an agent purchased wheat in his own name intending it for his principal, but without disclosing that he was acting for another. The principal later tried to enforce the contract. The court held that since the agent had not disclosed his authority or identity, the principal could not sue — showing that disclosure plays a key role in establishing agency rights.

Said v. Butt (1920 3 KB 497)

Here, an agent bought a theatre ticket for his principal, who was personally banned from the theatre. The court ruled that the undisclosed principal could not claim rights contrary to public policy — reinforcing that an undisclosed principal cannot exercise rights that would not have been available if his identity had been known.

Real-Life Example

Suppose Ravi, a businessman, wants to purchase goods from Amit but fears that Amit might charge a higher price due to their past disputes. So, he appoints Rohan as his agent and instructs him to buy the goods without disclosing Ravi’s name. Rohan purchases the goods in his own name.

Later, when Amit learns that Ravi was the real buyer, Ravi becomes liable for the payment. However, if Rohan has already paid Amit, Ravi cannot reclaim the money directly from Amit. Similarly, if Amit had any claims against Rohan (like unpaid dues from another deal), he can use that as a set-off against Ravi.

This shows that the law ensures fairness among all three — the principal, agent, and third party.

Mnemonic to Remember the Answer — “P.A.R.T.Y.”

Use the mnemonic “P.A.R.T.Y.” to recall the key points about the Undisclosed Principal:

• P – Principal Hidden: The principal’s identity is not revealed at the time of contract.
• A – Agent Liable: The agent is personally liable under Section 230.
• R – Rights Arise Later: The principal can later enforce the contract under Section 231.
• T – Third Party’s Option: The third party can sue either the agent or the principal (Section 232).
• Y – Yet Subject to Equities: Principal’s rights are subject to third-party defences.

Mnemonic Sentence:
“Parties Act Rightly To Yield Fairness.”
It helps you remember that both the principal and third party retain balanced rights and liabilities — ensuring fairness under the Law of Agency.

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