For various reasons, both the Agent and the Principal may prefer not to disclose the Principal’s identity (or even existence) to the Third Party that they are dealing with. Under this special agency relationship, the Undisclosed Principal should pay extra attention to both of his right to sue and the risk of being sued as discussed below.

Disclosed Principal

Under general agency law principles, if, at the time of contract, a third contracting party knows of the existence of the actual Principal, such contract will be formed directly between the actual Principal and the Third Party. In other words, provided that the Agent acts within his authority given or delegated by his Principal, the Agent will drop out of the scene.In this classic case of “Disclosed Principal”, the actual Principal and the Third Party can sue each other upon breach of contract by the other side.

Undisclosed Principal vs Unidentified Principal

Sometimes it may be more preferable not disclosing the identity or existence of the actual Principal who is acting behind.For example, a Principal acting through his Agent might choose not to disclose his identity for the reason of protecting his privacy. In addition, an Agent might also be unwilling to disclose the existence of his Principal behind as it would be easier for an Agent to bargain and conclude contracts by representing that he is the actual “Principal” so that he has the ultimate decision making power.

The above examples are situations where the principles of “Unidentified Principal” and “Undisclosed Principal” arise. The “Undisclosed Principal” differs from the “Unidentified Principal” in that for “Unidentified Principal” the Third Party actually knows that the Agent is acting for a Principal though his identity is not disclosed to the Third Party. Whereas for “Undisclosed Principal”, the Third Party believes that he is only contracting with the Agent since he does not know that the Agent is in fact acting on behalf of a Principal behind.

Undisclosed Principal – Right to Sue

Generally speaking, whether the Undisclosed Principal could take any legal actions against the Third Party upon any breach of contract would depend on whether a valid contract has been formed between the Undisclosed Principal and the Third Party. Essentially, where a valid contract has been formed, the Undisclosed Principal may sue or be sued on the relevant contract even though his existence was unknown to that Third Party.

In the English leading authority Fred Drughorn Ltd v Rederiaktiebolaget Transatlantic[1919] AC 203, and the Hong Kong case Siu Yin Kwan v Eastern Insurance Co Ltd [1994] 2 AC 199,it was held that for a valid contract to be formed, the following elements must be shown:-

1. Agent intends to act for the Undisclosed Principal;

2. Agent acts within his actual authority; and

3. The terms of the contract should not have excluded the Principal’s right to sue, and his liability to be sued (i.e. the contract itself should not show that the Agent is the true and only Principal).

If any of the above elements are not satisfied, no valid contract could be formed between the Undisclosed Principal and the Third Party. Consequently, the Undisclosed Principal could not enforce any legal rights against the Third Party in case of breach of contract.

On the other hand, provided that all the above elements can be satisfied, the Undisclosed Principal can enforce such contract or take legal actions against the Third Party, and vice versa.

Undisclosed Principal may be liable for all acts of Agent

In the event that the Agent has not acted within the scope of his actual authority, whether express or implied, the Principal will generally not be bound. This is because the Principal has not authorized the Agent’s act and therefore should not be held responsible for it. To hold otherwise would be to place an onerous obligation on Principal beyond what would be reasonably contemplated.

This general rule, however, does not apply where the Agent has “apparent authority” such that the Principal has through a representation lead the Third Party to believe that the Agent was authorized. In Watteau v Fenwick [1893] 1 QB 346, the English Court held that an Undisclosed Principal can be held liable for the actions of an Agent who was acting with an authority (regardless of whether the Agent had the actual authority to do so), provided that it was reasonable for a person in the Agent’s position to have such authority.

The effect of Watteau v Fenwickwas that any Undisclosed Principal could no longer avoid legal liability by relying on the fact that his Agent was acting outside his actual authority at the time of contract formation. Despite this case has been criticized by some judges and academics, itmay still be followed by the Hong Kong Courts.

Conclusion

Given the above legal effects as laid down in Watteau v Fenwick, it is therefore necessary for any Undisclosed Principal to select his Agent carefully and monitor the performance of his Agent closely so as to prevent him from exceeding the actual authority.