Legal consequences of contracts with undisclosed principal

If an agent makes a contract with a person, who neither knows nor has reason to suspect, that he is an agent, his principal may require the performance of the contract; but the other contracting party has, as against the principal, the same rights as he would have had as against the agent if the agent had been he principal (Sec 23 231) Agent will stand personally liable. However, the principal too has a right to intervene and assert his position as an undisclosed party. In such cases, third party has the same rights against the undisclosed principal as he had against the agent. The third party may use against the undisclosed principal as he had against the agent. The third may use against the principal any defense that would be available to him against the agent.

If the principal discloses himself before the contract is complete, the other contracting party may refuse to fulfill the contract, if he can show that if he had known who was the principal in the contract, or if he had known that the agent was not a principal, he would not have entered into the contract (Sec 231). The third party, therefore, has a right to repudiate the contract if he would not have contracted with the principal had he known of the existence of the principal. The third party has acted purely on the credit of the agent under the belief that he is not acting as an agent.

Where one man takes a contract with another neither knowing nor having reasonable ground to suspect that the other is an agent, the principal, if he requires the performance of the contract, can only obtain such performance subject to the rights and obligations subsisting between the agent and the other party to the contract (Sec 232). The third party must have no- reason to suspect that the person contracting was acting for the principal.


A who owes Rs 500 to B, sells Rs 1,000 worth of rice to B, A is acting as agent for C in the transaction but B has no knowledge nor reasonable ground of suspicion that such is the case. C cannot compel B to take the rice without allowing him to set off A’s debt.

In cases where the agent is personally liable, a person dealing with him may hold either him or his principal, or both of them liable(Sec 233).


A enters into a contract with B to sell him 100 bales of cotton, and afterwards, discovers that B was acting agent for C. A may sue either B or C, or both the price of the cotton.

Under English law, however, the liability of principal and agent is alternative. Under Indian law, agent and principal are both jointly and severally liable. However, where the third party elects to sue either the principal or agent only, he cannot them make a fresh election to sue both. He must be deemed to have waived his rights against one. It will therefore, be observed that the third party has a primary right against the principal, even though he was not aware of the existence lf the principal unless by express contract the liability of the principal is excluded. But once he elects to sue the agent, he cannot subsequently sue the principal. However, if his suit against the agent is dismissed he can subsequently use the principal. Only a judgment against the agent puts an end to third party’s election.

In cases where the agent is personally liable, a person dealing with him may hold either him or his principal, or both liable. But, when a person who has made a contract with an agent induces the agent to act upon the belief that the principal only will be held liable, or induces the principal to act upon the belief that the agent only will be held liable, he cannot afterwards hold liable the agent or principal respectively (Sec 234) When he has made final election he will be estopped from making a fresh election. This is the case where the person knowing the principal prefers to give credit to the agent. He will them be deemed to have induced the agent to believe that he will not be held liable. He will thus be stopped from claiming his rights against both the principal and the agent.

In other words, neither the existence nor the identity of the principal is disclosed where –

1) contract is enforceable either by or against the agent
2) third person may sue either the principal or the agent
3) undisclosed principal has the right to sue the third person subject to:
i) the authority of the agent to act was in existence at the time of the contract
ii) if an agent is sued by the third party, the undisclosed principal cannot intervene.
iii) The third party has same defense against the undisclosed principal as he against the agent.

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