Commercial Law – The Doctrine of Undisclosed Principal and Ratification

Overview of the doctrine of undisclosed principal

The law treats ratification by undisclosed principal differently to ratification by unnamed principal. Generally, the rule states that unauthorized contracts cannot be ratified by undisclosed principals especially when they have been made by the agents on behalf of the principal. For more than a century, the rule has been advanced but has at the same time failed to be justified; this research aims at addressing the panacea with regard to this issue. In the law of agency, the principal can carry out business as undisclosed or unnamed principal. In our case, we focus solely on the undisclosed principal “where the third party lacks prior knowledge that the agent is acting on behalf of the principal. Whenever the principal authorizes the agent to enter into contracts with third parties, the third party can hold the principal liable despite the fact the principal is undisclosed or unnamed.”  On the other hand, the principal can similarly enforce the contracts against the third parties regardless of whether he was undisclosed or unnamed, but with a few exceptions. 

“Where the agent enters into a contract with the third party lacking authority, the contract does not bind the principal.” On the same note, the contract cannot be enforced by the principal against the third party. Although the law allows the principal to ratify a contract that has already been entered into, this aspect has been criticized premised on the anomalies involved. With regard to unauthorized contracts, undisclosed principals cannot be held liable nor enforce them through ratification. This research will focus on the general rule that denies undisclosed principals this power that is made available to partially disclosed or disclosed principal. 

Research objectives

The research will delve into the following aims and objectives

1. To establish whether an undisclosed principal ratify unauthorized contracts
2. To explain the rights and liabilities of the agent under unauthorized contracts
3. To establish whether the agent can enforce unauthorized contracts
4. To explain the relationship between third party and the agent under unauthorised contracts 
5. To analyse the expectations of the third party under unauthorized contracts

Research questions

Based on the phenomena, the following will be answered by the research

1. Can an undisclosed principal ratify unauthorized contracts?
2. What are the rights and liabilities of the agent under unauthorized contracts?
3. Can the agent enforce unauthorized contracts?
4. What is the relationship between third party and the agent under unauthorised contracts?
5. What are the expectations of the third party under unauthorized contracts?

Justification/literature review

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Background

The House of Lords in 1901 made a landmark decision regarding undisclosed principals and ratification of contracts. In Keighley Maxted & Co v Durant, the court held that “undisclosed principals cannot ratify contracts.” In its analysis, the court sought to establish whether the undisclosed principle could be held liable on a contract allegedly ratified by him. Nevertheless, it is the basis for denial of contract enforcement rights on the premise of ratification. Interestingly, the rule was a product of a different course of action since the question before the court involved liabilities of undisclosed principals rather than their rights. Notably, the House of Lords failed to make this distinction between denying liabilities and denying rights but none of the courts even today have attempted. Why can’t undisclosed principals ratify unauthorized contracts?  To understand this, the paper will seek to discuss the Keighley, Maxted facts, the Court of Appeal decision and the stare decisis of the House of Lords

Ratification and why the undisclosed principal cannot ratify

Robert, in this case the agent was authorized by the principal (Keighley, Maxted & Co) to buy wheat at a price that was specified. The agent was not able to purchase the wheat at the price authorized but he nonetheless entered a contract with a third party (Durant & co) to purchase wheat at a price that was higher than specified. The agent failed to disclose to the 3rd party the identity of the principal he was representing and even went ahead to sign the contract as the agent. When the principal found out about the contract by the agent, he agreed and went ahead to instruct the agent to prepare for delivery. “Prior to delivery, the prices of wheat subsided and the 3rd party was informed that the agreement had been repudiated.” The principal was sued by the 3rd party after forcing him to sell the wheat at a lower price than previously agreed. The third party argued that by arranging for delivery, the principal had ratified the contract thus making him liable for damages the judge directed that since the agent had not disclosed the identity of the principal to the 3rd party, it was impossible for the principal to ratify the contract.

The court of appeal in its decision ordered for reversal and subsequently a new trial. in arriving at its decision, the court ruled that (i) ratification involves a previous command, and (ii) principals that are not disclosed can undertake contract enforcement and be found liable  on contracts authorized by the principal before signing of the contract takes place between the third party and the agent. As per Lord Collins, prior authority was equal to ratification and as such disclosure of the agent was not necessary.

The English legal system discusses the doctrine of undisclosed principal

The Keighley, Maxted & Co case went to further appeal and reached the House of Lords where it was unanimously reversed. In his opinion, The Earl of Halsbury failed to come about any precedent on the issues and intimated that he failed to establish relevance that undisclosed principals could be sued or sue on contracts that were not authorized. Allowing for ratification at this instance would come up a different contract far from the one previously entered into. Lord McNaughten also concurred with Lord Collins by asserting that all precedent was against ratification by the undisclosed principal and even suggested that the decision of the court of appeal did not make sense. In his opinion, Lord Shand concurred with reversal of the court of appeal decision and intimated that the only contract which had actually been made was between the third party and the agent. Further, Lord Davey states that the law was already operating on an anomaly by allowing authorized contracts to be enforced by undisclosed principals, the lord went on to state that allowing unauthorized contracts to be ratified by undisclosed principals could amount to more anomalies and the courts ought to correct anomalies. Lord James of Hereford also concurred and was curious about the undisclosed intentions of the agent. He disagreed that the thoughts of a man, unrecorded and unexpressed, could form the basis of a contract. Intention was further questioned by Lord Brampton who intimated that ratification is such incidences could be a lee way to deception and fraud; as such, he suggested that creation of a new contract would solve the case. In addition, Lord Robertson believed that the contract had already been ratified by the agent and there was no room for more ratification devoid of the credit of the principal pledged to the 3rd party. Finally, Lord Lindley talked about authorized contracts and undisclosed principals; he agreed to the usefulness of agents in commercial transactions and intimated that giving permission to agents to enforce ratification of contracts would be reaching too far.

Liability of the unnamed principal

The unnamed principal’s agent is liable to the 3rd party whenever he enters unauthorized contracts. Liability is premised on breach of implied warranty of authority or on the status of the agent as a party to the contract. The disclosed principal’s agent will be liable to the 3rd party after entering into unauthorized contract unless he informs the 3rd party that is unauthorized. If the agent by conduct implies to the third party that he is authorized or misrepresents facts to the third party by alleging that he is authorized, he remains liable on unauthorized contracts. If the agent never discloses the identity of the principal, he is still liable for unauthorized contracts. Liability is predicated on breach of implied warranty of authority, express misrepresentation or the status of the agent as a party to the contract. According to these rules, it is clear that agent whether disclosed, partially disclosed or undisclosed/unnamed are liable for unauthorized contracts. “When an agent enters into a contract with a 3rd party without the principal’s authority, the agent will be liable to the 3rd party whether the 3rd party was aware of the existence of the principal or not,” and whether the identity of the principal was disclosed or not. The principal whether undisclosed or disclosed ought to be allowed to ratify the contract.

The role of unnamed principal in unauthorized contracts (practical situation)

If a building contractor enters into a contractual relationship with a licensed plumber to carry out functions requiring performance by licensed plumbers, the principal who is not a licensed plumber is unable to ratify the contract. “Agents that enter unauthorized contracts on behalf of partially disclosed and disclosed principals are unable to enforce them against 3rd parties.” In essence, the agent cannot establish the coming into being of a contract that he purportedly made. However, the unnamed principal’s agents do not fall under this category since the contract purported is between the 3rd party and the agent. On this account, predicated on the fact that the 3rd party expected to be bound to the undisclosed principal’s agent, undisclosed principal’s agent can enforce the contracts that are not authorized against the 3rd party. At times, the powers of the agent and the principal are not identical; for example, the agent may have authority to carry out a function that the principal lacks, the principal cannot be allowed to ratify. 

Strengths and limitations of the doctrine of undisclosed principal

Is ratification by unnamed/undisclosed principal fair?

Arguments on allowing principles to enforce and ratify unauthorized contracts have been predicated on providing the 3rd party and specifically his expectations with regard to the agent-third party transaction. The aim of ratification is primarily to correct defects in the authority of the agent so that the dues the 3rd party ought to receive are what he gets. If ratification is only for purposes of protection of the 3rd party, it goes without saying that these expectations go against the undisclosed principal’s appearance and as such should be denied. Through ratification, an agency relationship is created, but this is permitted only for the protection of the third party. However, this analysis might be problematic more so when it comes to authorized contracts.  When an unauthorized agent acts, the transaction between the agent and the third party can be seen as an offer by the 3rd party directed to the principal. However, if this is adhered to, the 3rd party is allowed to withdraw before ratification by the principal occurs. Crucial to note is that commentators have held that the rule treats partially disclosed principals and undisclosed principals differently to unnamed principals. This is true because the agreement between the agent and the 3rd party could be interpreted as an offer if the agent discloses that he is unauthorized and that he will seek for the principal’s ratification. Nevertheless, this only applies to partially disclose and disclosed principals because once the agent informs the agent that he will seek authority from the principal it becomes partially disclosed. In a situation where the principal is undisclosed, it is not clear to the 3rd party of the steps require for contract completion. In this regard, rights to enforcement of the contract do not lie with the agent since there is no agreement to a binding contract; this is because the transaction between the third party and the agent constituted an offer only. However, the principal can later repudiate the contract without chances of going back to ratify. The liability of principals that are ratifying contracts is dependent on the agent’s control and that control precedes liability. The rationale behind this rule states that “…he who has commanded is legally responsible for the direct results and for the natural and probable consequences of his conduct.” It is irrelevant whether the orders are issued after or before the conduct. There is no difference between the ability of partially disclosed and disclosed to command and control the agent, and the ability of the undisclosed principal to command and control the agent on his behalf. If analysed on this premise, the undisclosed principal can be allowed to ratify unauthorized contracts.

The unnamed principal vis-a-vis the undisclosed principal

The position of the third party 

The transaction between the third party and the agent where the principal is undisclosed maintains the contract between the agent and the third party but at the same time, the obligation of the third party to carry out the contract is conditional on ratification by the principal. For purposes of ratification, this rationale treats partially disclosed and disclosed principals differently. Premised on the inability of the agent to enforce, the obligation of the 3rd party to perform is conditional on ratification by the principal. Nonetheless, this applies only with partially disclosed and disclosed principals because the undisclosed and unnamed principal’s agent can enforce the contract that is not authorized by the principal against a 3rd party. Therefore, the performance of the 3rd party does not depend on the principal. If ratification is done by the principal as a party to the agreement, this means that it is in congruence with the power of the unnamed principal to ratify. This is true since even in authorized contracts, unnamed principals are not considered parties. Further, once ratification has been made, its repudiation is impossible. Crucial to note is that the principal ratifying the contract does not supply consideration which is a must for contracts. Secondly, contracts have mutual assent as a core requisite that ought to be present for ratification purposes. The transaction between the agent and the third party is complete even before ratification. For contracts, the transaction is complete after completion of ratification. On this premise, the principal ratifying should not be assumed to be a party to the transaction leading to ratification of the contract. The relationship is based on agency law and as such is based on consensus rather than on contract. As such, the relationship between the principal and the agent is a fiduciary one since the agent acts with the interests of the principal at heart. In contracts, parties act not as fiduciaries but rather for their own benefit. The liability of the principal is not contractual; the status of the principal creates liabilities as well as rights.

The principal ought to choose unnamed principal rather than undisclosed principal

Allowing the secret intentions of the agent to flourish would create obligations and rights that would be undesirable to a great extent since this would accentuate fraud. On this premise, some commentators have on this ground sought to deny agents the right to ratification. Further, this position is true per se because under undisclosed principal, the agent may commit fraud; this same danger is less for agents contracting on behalf of unnamed princiapls.

Conclusion

To a great extent, it is difficult to qualitatively and precisely evaluate which approach would solve the conundrum of undisclosed and unnamed principals ratifying unauthorized contracts, a quantitative approach would equally be of little effect. The study has looked at the rationale used in courts and by practitioners to establish rights and obligations of agents, principals and third parties in the commercial world. Through the various opinions of the judges sitting in the House of Lords, it is evident that the principal cannot ratify unauthorized contracts. Having said this, it is also true that some rules in agency and contracts assert that the principal can indeed ratify unauthorized contracts in specific scenarios that I have noted above. Notably, the research has been able to point out inconsistencies in the rule that undisclosed principals cannot ratify contracts. To alleviate these problems in commercial dealings, the unnamed principal should be done away with and laws should force the agents to identify their principals. In addition, the law should discourage ratification since it has been found to be against commercial needs and unfair to 3rd parties.

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