INDIRECT REPRESENTATION AND THE LANDO PRINCIPLES
An Analysis of Some Problem Areas from the Perspective of English Law
D. Busch1
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Abstract
The unpublished second report of the Lando Commission on The Principles of European
Contract Law (‘the Principles’ or ‘PECL’) contains an important recent attempt to harmonise the
laws of agency of European jurisdictions. Chapter 3 of the Principles deals with ‘Authority of
Agents’. Following the civil law model, Article 3:102 PECL distinguishes between direct and
indirect representation.
Direct representation exists where an agent acts ‘in the name of’ a principal (Art.
3:102(1) PECL). If the agent acts within the scope of his authority (real or apparent), his acts
bind the principal and third party directly; the agent drops out. Indirect representation covers two
types of case in which a principal enlists the assistance of an intermediary to act for him in
transactions with third parties (Art. 3:102(2) PECL). The first can be termed ‘undisclosed
agency’. In these cases, the principal confers authority on the intermediary to create privity
between him (the principal) and third parties. As it happens, however, the third party neither
knows nor has reason to know that the intermediary acts as an agent. The second category of
indirect representation can for convenience be termed ‘commission agency’. In this case, by
contrast, the principal does not confer authority on the intermediary to create privity of contract
between him (the principal) and third parties. The intermediary is to act ‘in his own name’: he is
to contract with third parties in a personal capacity. In both cases of indirect representation,
intermediary and third party are bound to each other; principal and third party are not (Art. 3:301
PECL). Even so, in two situations the principal is entitled to exercise against the third party the
rights that are acquired on his behalf by the intermediary: if the intermediary goes bankrupt or is
guilty of a fundamental non-performance of his duties to the principal (Art. 3:302 PECL). The
third party is entitled, in similar circumstances, to exercise against the principal the rights that the
third party has against the intermediary (Art. 3:303 PECL).
This article compares the indirect representation provisions of the Principles (Arts.
3:301-3:304 PECL) with the relevant body of English law. The aim is to ascertain whether it
would be acceptable to adopt the indirect representation provisions for England. At first sight,
both categories of indirect representation may cause difficulties for English law.
1
LL.M. (Utrecht), M. Juris (Oxon.), associate of the Molengraaff Institute for Private Law, Utrecht University. I would like to
thank Professor F.M.B. Reynolds (Worcester College, University of Oxford) and S.W. Watterson, B.A. (Oxon.) (St. John’s
College, University of Oxford) for their valuable comments on an earlier draft of this article.
The first category (‘undisclosed agency’) is problematic because, at first sight, English
law and the Principles take opposite positions on the legal relationships which result where an
undisclosed agent contracts with a third party. Under English law, undisclosed principal and
third party are generally allowed to sue each other. By contrast, the starting point under the
Principles is that they are not entitled to do so. Nevertheless, the Principles allow important
exceptions to that starting point. The result is that, contrary to first appearances, the application
of the Principles and English law would produce largely similar results. The provisions of the
Principles in relation to the first form of indirect representation are unlikely, for that reason, to
prove unacceptable to English lawyers.
The second category (‘commission agency’) is problematic for a rather different reason.
This concept refers to intermediaries with two important characteristics. First, the intermediary
does not have authority to create privity of contract between principal and third party. Secondly,
if the intermediary does contract with a third party, he only creates a relationship between him
(the intermediary) and the third party; he will not create a relationship between principal and
third party. In general, therefore, principal and agent will not be entitled to sue each other. The
difficulty here is that it is unclear whether English law recognises such a concept. Even so, this
should not render the provisions of the Principles on the second form of indirect representation
unacceptable to English lawyers. Recognition of the possibility of commission agency in English
law would increase the options of commercial parties when deciding how to structure their
transactions.
Contents
1. Introduction
1.1 The desirability of unification of the law of agency
1.2 The Principles of European Contract Law
1.2.1 General
1.2.2 Direct and indirect agency in the Principles
1.2.3 The legal significance of the agency provisions in the Principles
1.3 The subject matter of this article
2. Terminology used in the Principles
2.1 General
2.2 Agents acting in the name of their principal and agents acting in their own name
2.3 Intermediaries acting in their own name but on behalf of their principal
3. The position of the undisclosed principal
3.1 General
3.2 Comparison between Articles 3:302-304 PECL and the English undisclosed principal
doctrine
3.2.1 When are direct actions available?
3.2.2 Legal basis
3.2.3 Effect of performance by principal or third party
3.2.4 Defences and rights of set-off
3.2.5 Restrictions
3.2.5.1 Express and implied terms of the contract
3.2.5.2 Personal rights
3.2.5.3 Personality of the parties and knowledge of the principal
3.2.5.4 Personality of the parties and knowledge of the agent
3.2.5.5 Misrepresentation
3.2.5.6 Rights acquired on the principal’s behalf
3.2.6 The right of election
4. The position of the commission agent
4.1 General
4.2 Cases supporting the possibility of ‘commission agency’ in English law
4.3 Cases opposed to the possibility of ‘commission agency’ in English law
4.4 The implications of an analysis of the case law
5. Conclusions
Appendix
Bibliography
1. Introduction
1.1 The desirability of unification of the law of agency
A law of agency is a commercial necessity in every developed economic system. Manufacturers
may delegate the purchase of raw materials to an agent; wholesalers may sell their goods through
trade representatives or commission agents. There are many reasons why people choose not to
act for themselves, and instead enlist the assistance of others who transact with third parties ‘for
them’, ‘on their account’, ‘as their agents’ or ‘in their interests’. It enables them to participate in
commercial transactions on a massive scale.
Today, commercial transactions are to a large extent transnational in nature. Despite this,
the law of agency still differs from country to country. The absence of a uniform law of agency
inevitably leads to intricate questions of the conflict of laws. The various types of difficulties are
illustrated by the following example:
Principal P (English), an importer in London, instructs his agent A (English) in
Rotterdam to purchase goods from manufacturer T (Dutch) in Amsterdam. P grants A
authority to create privity of contract between him (P) and T, with the result that A drops
out. A concludes a contract with T, but does not disclose the fact that he is acting on
behalf of another (P): A does not want T to bypass him and deal directly with P in future
transactions, thereby depriving A of future opportunities to earn commission.
In the above situation, is the relationship between P and A governed by English law or by Dutch
law? And which law is applicable to the external part of the transaction? The answer to these
questions is important, because English and Dutch law differ in important ways. Under Dutch
law, T will generally only have rights against A, unless it was or should have been clear to T that
A was only acting as an agent. Under English law, on the other hand, T will prima facie have a
right of election by virtue of the undisclosed principal doctrine: he may sue either A or P on the
contract. These intricate questions would not arise if European jurisdictions had a uniform law of
agency.
1.2 The Principles of European Contract Law
1.2.1 General
The unpublished second report of the Lando Commission on The Principles of European
Contract Law (‘the Principles’ or ‘PECL’) contains an important recent attempt to harmonise the
laws of agency of European jurisdictions.
1.2.2 Direct and indirect agency in the Principles
Chapter 3 of the Principles deals with ‘Authority of Agents’. The scope of the Chapter is limited
in several ways. Most obviously, it only governs the authority of an agent or other intermediary
to bind his principal in relation to a contract with a third party (Art. 3:101(1) PECL).2 In
addition, it only applies to the external relationship: that is, the relationship between principal or
agent on the one hand, and the third party on the other. It does not deal with the internal
relationship between principal and agent (Art. 3:101(3) PECL).3 Finally, the Chapter expressly
excludes cases where the agent’s authority is conferred by law, or where an agent is appointed by
a public or judicial authority (Art. 3:101(2) PECL).
In Article 3:102 PECL, a distinction is drawn between ‘direct representation’ and
‘indirect representation’. Article 3:102(1) PECL expresses the concept of direct representation.
This covers cases where the third party knows or has reason to know that his counterparty is
dealing as an agent for a principal, named or unnamed.4 The principles governing cases of direct
representation are dealt with in Section 2 of Chapter 3 (Arts. 3:201- 3:209 PECL). Where the
agent deals within the scope of his express, implied, or apparent authority as defined by Article
3:201 PECL, his acts bind the principal and the third party directly and the agent drops out (Art.
3:202 PECL). Nevertheless, the agent and the third party or the principal and the agent may by
agreement depart from this rule and impose personal liability upon the agent. He may become a
co-obligor or a guarantor of the principal’s obligations. Article 3:203 PECL establishes another
exception: where an agent enters into a contract in the name of a principal whose identity is to be
revealed later (i.e. an unnamed principal), but fails to reveal that identity within a reasonable
time after a request by the third party, the agent himself is bound by the contract.
Article 3:102(2) PECL expresses the concept of indirect representation. This covers two
types of case. The first is where an intermediary acts in his own name but on behalf of a principal
(a notion the meaning of which is discussed in section 2 below). The third party may or may not
know that the party with whom he is dealing is acting on behalf of another. The most typical
commercial example, found in continental countries, is the so-called ‘commission agent’. The
second type of case is where a principal has granted his agent authority to create privity of
contract between him (the principal) and the third party, but where the agent does not disclose
that he is acting as an agent and acts in his own name instead. So described, this second form of
2
Text & Comments (1996) p. 65.
3
Ibid., p. 64. However, this separation cannot completely be preserved. In particular, some of the grounds for termination of the
agent’s authority are rooted in the internal relationship (see Art. 3:209 PECL ) (ibid., p. 64).
It is pointed out in ibid., p. 66, that direct representation also covers the case where an agent acts in the name of ‘a’ principal but
does not disclose that principal’s name. It is even said, more controversially, that the agent may not even have a principal at the
time of the conclusion of the contract. The agent is, however, bound to reveal the name of the principal if the third party so
requests. See Article 3:203 PECL.
4
indirect representation seems to cover the situation which is known in English law as the
situation of the ‘undisclosed principal’. As a rule, and contrary to the rule for direct
representation, no direct relationship between the principal and the third party comes into being
between principal and third party; instead, the intermediary and the third party become bound to
each other (Art. 3:301(1) PECL).5
1.2.3 The legal significance of the agency provisions in the Principles
The Principles are a private initiative. As such they do not have the authority of national,
supranational, or international law.6 This does not mean, however, that the agency provisions of
the Principles are of no present legal relevance at all. One would also hope that the provisions
will provide a basis for a European law of agency in the future.7
Even now, the Principles may become legally relevant if the third party is situated in a
different state from the principal and his agent. In such circumstances, a question clearly arises
as to what legal rules govern the relationship between the parties. The Principles may come to
govern the legal relationship between the parties in two different ways.
First, where the third party is situated in a different state from the principal and his agent,
the principal may give his agent instructions to make a choice for the Principles. The contract
that the agent concludes may be one between the principal and the third party or one between the
agent and the third party, depending on whether there is a case of direct or indirect
representation. A reason for giving instructions to make a choice for the Principles may be to
avoid difficulties in agreeing on a national system of law with the third party. A choice for the
Principles may be made in two different forms, which have different effects. First, where the
parties have agreed that their contract is to be governed by the Principles (Art. 1:101(2) PECL),
this may have the same effect as an ordinary choice of law clause: the contract is not subject to
the legal system (including its mandatory rules) which would govern it without the ordinary
choice of law clause. One additional condition must, however, be fulfilled according to Article
1:103 PECL: the law of the forum must allow the parties to choose the Principles as if they were
the rules of a national legal system. This is a severe limitation. Secondly and alternatively, the
parties may agree merely to incorporate the Principles into the body of the specific contract (Art.
1:101(2) PECL). Here, the contract remains subject to that legal system which, according to the
forum state’s conflict of laws rules, determines the applicable national law, including its
domestic mandatory provisions.8 A choice for the Principles in the latter way may exclude
application of the agency provisions in the Principles. It may therefore be preferable for the
principal to instruct his agent to make a choice for the Principles so that they govern the contract.
Disputes may arise as to whether the principal gave his agent instructions to make a
choice for the Principles or even whether he gave his agent authority to conclude the contract at
all. This is a question of construction of another contract, namely the contract between the agent
5
See the Appendix for the text of the relevant provisions.
6
Lando and Beale (1995) p. 40.
7
The longer-term objective of the Principles is to help bring about the harmonisation of general contract law within the European
Union. Ibid., pp. xviii-xix.
8
Text & Comments (1996) pp. 1-2.
and the principal. The law which governs this contract must apply its rules of construction to
solve the dispute. It is possible that the principal and his agent may make a choice for the
Principles as regards the contract between them. In that case, the rules of interpretation given in
Chapter 5 (Arts. 5:101-107 PECL )9 must be taken into account in resolving the dispute.
However, whether there is a case of apparent authority cannot usually be determined by
construing the contract between the principal and the agent, because it is something between
principal and third party rather than between principal and agent.10 The question of apparent
authority should therefore be governed by the law which governs all other external issues. This
means that where the contract which is concluded with the third party is governed by the
Principles, the question whether there was apparent authority should be solved by applying the
Principles. It is, however, a well-known problem of the conflict of laws which law governs the
question whether the parties have agreed at all.11 The dominant view applies the putative proper
law, which could lead to application of the Principles.12 But they do not necessarily apply where
they are only incorporated into the contract, because whether there is apparent authority or not
may be a domestic mandatory rule.
Secondly, the Principles may also be relevant where the principal did not give his agent
any instructions to make a choice for the Principles or a national legal system. Where the
contract contains clauses referring to ‘general principles of law’ or the ‘lex mercatoria’, some
courts and arbitral tribunals may apply the Principles (Art. 1:101(3)(a) PECL). Where the
contract does not contain these clauses courts and arbitral tribunals may similarly apply the
Principles (Art. 1:101(3)(b) PECL). The justification for applying the Principles in both these
cases is that it is hoped that the Principles will furnish a more appropriate basis than any system
of national contract law for the adjudication of an international contract.13
1.3 The subject matter of this article
This article seeks to ascertain whether the indirect representation provisions in the Principles
could be acceptable to English lawyers. These provisions deal with two types of case, which can
conveniently be described as ‘undisclosed agency’ and ‘commission agency’. At first sight, both
categories of indirect representation may cause difficulties for English law.
The first category (‘undisclosed agency’) is problematic because English law and the
Principles appear to take opposite positions on the legal relationships which result where an
undisclosed agent contracts with a third party. Under English law, the undisclosed principal
doctrine has the effect (as a rule) that where an agent does not reveal to the third party that he has
authority to create privity of contract between the principal and the third party, the third party has
the right to sue either the agent or the principal (the right of election) and the principal may sue
the third party. By contrast, under the Principles, situations involving undisclosed principals
9
Ibid., pp. 133-44.
10
It is therefore clear that the question of apparent authority cannot arise in undisclosed agency situations.
11
Rome Convention, Art. 8.
12
This is the view which is assumed in Article 1:104 PECL.
13
Lando and Beale (1995) pp. 41-42.
amount to indirect representation with the result that (as a rule) the third party may only sue the
agent and that the principal has no action against the third party.
The second category (‘commission agency’) is problematic for a different reason. English
law seems to be unfamiliar with the idea of intermediaries acting on behalf of a principal but in
their own name. It does not seem to acknowledge the existence of the commission agent known
in continental countries. In the Principles, this type of case also amounts to indirect
representation, with the effect that principal and third party may not (as a rule) sue each other.
This article compares the relevant body of English law with the relevant agency
provisions in the Principles in order to find out whether these problem areas are such that the
agency provisions in the Principles are unacceptable from the perspective of English law. To the
extent that they are unacceptable, the Principles may not serve their immediate and longer-term
objectives.14
2. Terminology used in the Principles
2.1 General
Common lawyers will generally be unfamiliar with the rather continental terminology in which
the Principles are drafted. It might not be clear to common lawyers what it means to say that an
agent acts ‘in the name of his principal’ or ‘in his own name’, or that an intermediary acts ‘in his
own name but on the principal’s behalf’. Common lawyers express themselves differently. In
English law, agency is generally regarded as a situation in which a person acts ‘on behalf of’
another, either with the knowledge of the third party with whom he deals (disclosed agency) or
without his knowledge (undisclosed agency).15
The focus of this article is on the two problem areas outlined above. But before turning to
these areas, it is necessary to explain some of the terminology used in the Principles.
Unfortunately, the drafters did not explain their expressions in a way which would make them
comprehensible to common lawyers. Both have essentially the same meaning in most continental
jurisdictions.16 The explanations which follow will nevertheless refer principally to Dutch law:
that is the jurisdiction with which the author is most familiar.
2.2 Agents acting in the name of their principal and agents acting in their own name
Agents act ‘for’, ‘on behalf of’ or ‘in the interest of’ their principals, in a factual sense, whether
they act ‘in the name of their principal’ or ‘in their own name’. The distinctive characteristic of
agents who act ‘in the name of’ their principal is that the third party with whom the agent deals
understands that the latter is only acting (and contracting) in the capacity of a representative of
someone else (his principal) who authorised him to do so.17 The principal may be named or
14
See section 1.2.3.
15
Reynolds (1996) pp. 1-29.
16
Zimmermann (1996) pp. 46-47, 49-50; Verhagen (1995) pp. 32-33. Also on representation: Zweigert and Kötz (1992) pp.
459-70.
17
The principal either expressly or impliedly granted his agent authority to act as his representative or is treated as having granted
unnamed. The third party may understand that the agent acts in a representative capacity because
he is expressly informed of that fact by the agent. Alternatively, it may merely appear to be so
from the circumstances of the case.18
It is only if agents act ‘in the name of their principal’ in this sense that a direct contracual
relationship can arise between principal and third party as a result of the agent’s dealings. This is
the effect of the continental ‘publicity principle’.19 The explanation for that principle can be
traced to the doctrinal foundations of contractual obligations in continental jurisdictions. It is
generally thought that ‘autonomy of the will’ is a fundamental notion in contract law. One
manifestation of this idea is the proposition that a party should be free to decide with whom to
contract.20 That freedom does not exist unless the third party knows that the other party is
actually contracting as representative of another rather than in a personal capacity.
Where a third party does not understand that the other party (the agent) was acting (and
contracting) as a mere representative, he can only intend to contract with the agent personally.
He is therefore permitted to treat the undisclosed agent as a party to the contract and is not
compelled to deal with the undisclosed principal - a stranger with whom he never intended to
contract. If it were otherwise, and the third party was compelled to treat the undisclosed principal
as a party to the contract, the third party’s intentions would not be respected.
Of course, if the agent and third party become bound by the contract, the intentions of the
agent may not be respected: he may not have intended to become a party to the contract. But this
is acceptable: the agent induced the third party to believe that he (the agent) intended to contract
personally and the third party contracted on that basis. The intentions of the principal are not
respected either: he intended that the agent should so act as to establish privity of contract
between him (the principal) and the third party. Again, this is acceptable. The principal chose to
act through an agent. He, rather than the third party, should bear the risk that his plans may fail if
the agent acts contrary to his instructions.
2.3 Intermediaries acting in their own name but on behalf of their principal
The phrase ‘in his own name’ refers to the extent of the agent’s authority to create relationships
with third parties. An agent or intermediary acts ‘in his own name’ when he acts ‘for’, ‘in the
interest of’ or ‘on behalf of’ a principal in a factual sense, but does not have authority to create
privity between his principal and third parties. In these circumstances, if the agent contracts with
a third party, he can only do so in personal capacity. Any contract will be between the agent and
third party; no direct contractual relationship can be created between principal and third party. It
is irrelevant that the third party knows that the agent is, in a factual sense, acting ‘on behalf of’
another. However, the economic involvement of the principal is not disregarded in all
authority if his statements or conduct induce the third party reasonably and in good faith to believe that the agent has been
granted authority for the act performed by him. See Article 3:201 PECL.
18
E.g. Hoge Raad (Dutch Supreme Court) on the 11th of March 1977 in Stolte v. Schiphoff (NJ 1977, 521).
19
Art. 1984 Code civil; Art. 1388 Codice civile; § 164 II BGB; Art. 3:60 BW. On the publicity principle see, e.g., Zimmermann
(1996) pp. 46-47; Verhagen (1995) pp. 32-33.
20
E.g. Bloembergen et al. (1995) No. 119. In addition, the publicity principle may also be for the benefit of third parties, who
have an interest in the certainty and clarity of legal relations. See Zimmermann (1996) p. 47 n. 91.
circumstances.21
The foreign words usually translated into English by the words ‘on behalf of’22 denote
the fact that, as between principal and agent, the risk of loss and the opportunities for profit from
dealings with third parties lie with the principal.23 An intermediary of this sort is typically
remunerated by commission, with the result that it is the principal who benefits most from any
transactions. The following example illustrates how it is the principal rather than the
intermediary who bears the risk arising from transactions with third parties:
Principal P instructs intermediary A to buy in his own name but on P’s behalf goods from
third party T. T fails to deliver the goods to A. A will in principle24 not be liable in
damages to P. A will only be liable where T’s failure to deliver the goods to A is
somehow due to A’s fault. The position would be entirely different where A resells the
goods to P. In that case, A is in principle liable in damages to P for non-delivery of the
goods where T fails to deliver them to A, even where this is not due to A’s fault.
3. The position of the undisclosed principal
3.1 General
Lord Lloyd of Berwick summarised the common law doctrine of the ‘undisclosed principal’ in
the case Siu Yin Kwan v. Eastern Insurance Co. Ltd.:25
(1) An undisclosed principal may sue and be sued on a contract made by an agent on his
behalf, acting within the scope of his actual authority. (2) In entering into the contract, the
agent must intend to act on the principal’s behalf. (3) The agent of an undisclosed
principal may also sue and be sued on the contract. (4) Any defence which the third party
may have against the agent is available against his principal. (5) The terms of the contract
may, expressly or by implication, exclude the principal’s right to sue, and his liability to
be sued. The contract itself, or the circumstances surrounding the contract, may show that
the agent is the true and only principal.
The starting point in English law as regards agents of an undisclosed principal is therefore that
the principal may sue and be sued on the contract concluded on his behalf.26
21
See Articles 3:302-304 PECL, discussed in section 3.
22
In the Netherlands: op eigen naam, maar voor rekening van de lastgever handelen (to act on account of the principal but in the
agent’s own name, Art. 7:414 (1) and (2) BW); the German HGB § 383 gives the following definition of the commission agent:
Kommissionär ist, wer es gewerbsmässig übernimmt, Waren order Wertpapiere für Rechnung eines andern (des Kommittenten)
in eigenem Namen zu kaufen und zu verkaufen.
23
E.g. Kortmann, De Leede and Thunnissen (1994) No. 152.
24
This may, of course, be different where principal and intermediary agree that the latter is a del credere agent.
25
[1994] 2 A.C. 199, 207.
26
See also, inter alia, the cases Thomson v. Davenport (1829) 9 B. & C. 78, 90; Boyter v. Thomson [1995] 2 A.C. 628; Reynolds
The starting point in the Principles is completely different. Where the third party neither
knows nor has reason to know that the intermediary acts as an agent, the undisclosed agent and
the third party are bound to each other. Article 3:301(1) PECL reads:
Where an intermediary acts
(a) on instructions and on behalf of, but not in the name of, a principal, or
(b) on instructions from a principal but the third party does not know and has no reason to
know this, the intermediary and the third party are bound to each other.
At first sight, the Principles may therefore seem unacceptable from the point of view of English
law. Nevertheless, the exceptions which they allow to their starting point may be such that an
application of the Principles and English law will not ultimately produce very different results.
3.2 Comparison between Articles 3:302-304 PECL and the English undisclosed principal
doctrine
3.2.1 When are direct actions available?
Under English law, a third party can generally sue an undisclosed principal (and vice versa). But
in practice these rights are more likely to be exercised by the principal or the third party in two
situations. They are: where the agent goes bankrupt,27 or where he fails to perform his
obligations to his principal or to the third party.
It is hardly surprising that, in just these circumstances, the Principles recognise
exceptions to the general rule28 and permit direct actions between principal and third party.
Article 3:302(b) PECL gives the principal the right to exercise against the third party the rights
acquired on the principal’s behalf by the intermediary (the so-called actio directa). The actio
directa is available where the intermediary becomes insolvent, or if he commits a fundamental
non-performance to the principal, or if prior to the time for performance it is clear that there will
be a fundamental non-performance when it becomes due (anticipatory fundamental
non-performance). Similarly, the actio contraria is available to a third party if the intermediary
becomes insolvent, or if the intermediary is guilty of fundamental non-performance or
anticipatory fundamental non-performance of his obligations to the third party (Art. 3:303(b)
PECL). In order to enable the principal and the third party to exercise their direct actions, the
intermediary must communicate on demand the name of the third party or the principal (Arts.
3:302(a) and 3:303(a) PECL).
The term ‘fundamental non-performance’ requires some explanation. By Article 8:103
PECL non-performance of an obligation is fundamental to the contract in three different types of
case.29 They are: first, where strict compliance with the obligation is of the essence of the
(1996) pp. 408-26.
27
The origin of the undisclosed principal doctrine is even said to lie in the right of the principal of a factor to intervene in the
factor’s bankruptcy. See Stoljar (1961) pp. 204-11.
28
On Articles 3:302-3:304 PECL see Text & Comments (1996) pp. 86-90.
29
Lando and Beale (1995) pp. 125-29.
contract (sub (a)); secondly, where non-performance substantially deprives the aggrieved party
of what he was entitled to expect under the contract, unless the other party did not foresee and
could not reasonably have foreseen that result (sub (b)); and thirdly, where non-performance is
intentional and gives the aggrieved party reason to believe that he cannot rely on the other
party’s future performance (sub (c)).
So defined, the concept of ‘fundamental non-performance’ in the Principles is not likely
to cause difficulties for English lawyers. English law uses similar concepts. In particular there is,
as the drafters state,30 a direct correspondence to tests laid down in two English cases and to a
provision in the Sale of Goods Act 1979. Subsection (a) of Article 8:103 PECL expresses a test
which resembles a test laid down in Bunge Corp. v. Tradax S.A.31 The test was there used to
determine when a term of a contract should be classified as a ‘condition’, with the effect that any
breach would give the other party a right to terminate the contract. Subsection (b) of the Article
resembles a test stated by Diplock L.J. in Hong Kong Fir Shipping Co. Ltd. v. Kawasaki Kaisha
Ltd.32 to determine when breach of an ‘innominate term’ in a contract would give the other party
a right to terminate. Finally, subsection (c) is similar to section 31(2) of the Sale of Goods Act
1979 on deliveries by instalment.33 The only substantial difference between the provisions seems
to be that Article 8:103 (c) PECL is confined to intentional breaches whereas under English law
it is established that even an unintentional fundamental breach may give rise to actual or
anticipatory repudiation of the contract.34 Nevertheless, this difference is, it is submitted,
immaterial in relation to undisclosed agency and commission agents, because Articles 3:302 and
3:303 PECL refer to the situation where it is clear prior to the time of performance that there will
be a fundamental non-performance when it becomes due, and do not draw a distinction between
intentional and unintentional anticipatory fundamental breaches.
It therefore appears that the circumstances in which direct actions are permitted between
principal and third party and the language which is used in the Principles to describe these
situations, may well be acceptable to English lawyers. Bankruptcy and (anticipatory)
fundamental non-performance to the principal or the third party are, it is submitted, also the key
situations in England in which the principal will wish to sue the third party and vice versa.
Furthermore, the concept of fundamental non- performance (as defined in Art. 8:103 PECL) and
the references in Articles 3:302 and 3:303 PECL to anticipatory breaches will sound familiar to
English lawyers.
3.2.2 Legal basis
The Principles allow the principal, in the circumstances described in 3.2.1, to exercise against the
third party the rights acquired on the principal’s behalf by the intermediary (Art. 3:302(b)
PECL). Conversely, they allow the third party - in similar circumstances - to exercise against the
30
Ibid., pp. 128.
31
[1981] 1 W.L.R. 711.
32
[1962] 2 Q.B. 26, 72.
33
See the Appendix for the text of this section.
34
E.g. Universal Cargo Carriers Corp. v. Citati [1957] 2 Q.B. 401, 438.
principal the rights which the third party has against the intermediary (Art. 3:303(b) PECL).
These rights may be exercised only if notice of intention to exercise them is given to the
intermediary and to the principal or the third party, respectively (Art. 3:304 PECL).
In England, no notice of any kind is required for triggering off the undisclosed principal
doctrine: the undisclosed principal may (as a rule) sue and is liable to be sued as a matter of law.
The exact legal basis of the English doctrine is, however, unclear and is hard to reconcile with
the doctrine of privity of contract.35 It is probably best explained simply as an exception to the
doctrine, which is justified on grounds of commercial convenience.36
Nevertheless, the fact that the Principles require notice of intention to exercise direct
rights before they may be exercised, whereas English law does not, does not constitute so
significant a difference between the two bodies of law that the agency provisions in the
Principles would be unacceptable in England. The notice requirement is surely an advantageous
requirement which tends to promote certainty.
3.2.3 Effect of performance by principal or third party
Under the Principles, where the third party has performed his obligations under the contract
between him and the intermediary, it logically follows that the rights against the third party
which are acquired on the principal’s behalf and which may be exercised by the principal are
extinguished. It is different where the third party received the principal’s notice of intention to
exercise his rights under Article 3:302 PECL before performance to the intermediary. In that
case, the third party is no longer entitled to perform to the intermediary and if he nevertheless
performs, he is not discharged as against the principal (Art. 3:304 PECL).
It is not possible to apply the same reasoning to the converse position. In the case of
performance by the principal to his intermediary, it does not follow that the third party’s rights
against the intermediary are extinguished. Nevertheless, Article 3:304 PECL provides that, upon
receipt of notice of the third party’s intention to exercise his rights under Article 3:303 PECL,
the principal is no longer entitled to make performance to the intermediary. If he nevertheless
performs, he is not discharged as against the third party. Conversely, it follows, it is submitted,
that the principal is entitled to make performance before receipt of such notice with the effect
that he is also discharged in relation to the third party.
In English law, the old case of Coates v. Lewes37 is often cited for the proposition that the
third party is discharged by payment to the agent prior to discovery of the principal. In Ramazotti
v. Bowring,38 however, estoppel reasoning was applied: it was held that the third party is only
discharged where the principal was in some way at fault in misleading the third party. But this
case should not be followed, because it is difficult to see how the third party can ever rely on the
representation of someone of whom he has not heard.39
35
On the legal basis of the undisclosed principal doctrine see Reynolds (1996) pp. 409-11.
36
Siu Yin Kwan v. Eastern Insurance Co. Ltd. [1994] 2 A.C. 199, 207 per Lord Lloyd of Berwick.
37
(1808) 1 Camp. 444.
38
(1859) 7 C.B. (N.S.) 851; also Cooke & Sons v. Eshelby (1887) 12 App. Cas. 271.
39
Reynolds (1996) p. 441.
Conversely, it was held in Armstrong v. Stokes40 that where an undisclosed principal
settles with his agent at a time when the third party still does not know that the agent acted for a
principal, the principal is discharged. This was because it would produce ‘intolerable hardship’41
if the principal were to pay twice. In the cases of Irvine & Co. v. Watson & Sons42 and Davison
v. Donaldson,43 however, estoppel reasoning was again applied, this time to the effect that the
principal would only be discharged where the third party was in some way at fault in misleading
the principal. But these cases appear to have involved unnamed principals, and it is therefore
doubtful whether they are good authority for undisclosed principal situations.44 It has been
suggested that in this situation it is equally hard for the third party not to be paid at all.45
However, it is submitted that the law should have no sympathy for the third party, since he did
not rely on the credit of a principal of whose existence he was unaware at the time of contracting.
Of course, whenever the undisclosed principal is sued, the third party gets a windfall of this kind,
but that does not mean that the law should not deprive the third party of this windfall where the
legitimate interests of the undisclosed principal so require, e.g. where he settled with the agent
prior to discovery of the undisclosed principal.
Thus, as to the effect of performance by the third party or the undisclosed principal, it is
submitted that there is probably no difference between (the preferable view of) English law and
the Principles. The Principles may well be acceptable therefore from the English point of view.
3.2.4 Defences and rights of set-off
Where the principal (whether undisclosed or the principal of a commission agent) exercises his
actio directa, he is subject to any defences which the third party may set up against the
intermediary (Art. 3:302(b) PECL). It would prejudice the third party if this were to be
otherwise: the third party contracted with the intermediary personally, so he would expect to be
allowed to plead against the intervening undisclosed principal (or principal of a commission
agent) his defences against the intermediary. Where the third party exercises his actio contraria,
he is subject to any defences which the intermediary may set up against the third party and those
which the principal may set up against the intermediary (Art. 3:303(b) PECL).
In English law the position appears to be different. Where a principal (disclosed or
undisclosed) sues the third party, the latter is said to have all the defences which he would have
had against the principal if the principal had himself made the contract in the same
circumstances.46 It is submitted that if it exists, this sweeping rule (presumably based on the idea
that the contract is made between principal and third party) is unnecessary for the protection of
40
(1872) L.R. 7 Q.B.D. 598.
41
At p. 610.
42
(1880) 5 Q.B.D. 414.
43
(1882) 9 Q.B.D. 623.
44
Reynolds (1996) p. 437.
45
Treitel (1995) p. 648.
46
Reynolds (1996) pp. 432-33, with references to cases.
the third party. The third party always thought he was contracting with the agent and never
expected to have the benefit of these defences.
It is also said in English law that, because the contract in the case of undisclosed agency
is initially made between the third party and the agent, the third party should not be prejudiced
by the intervention of the undisclosed principal. As a result, the third party should, in addition, be
able to plead against the principal all defences against the agent (including set-offs47) which had
accrued before he had reasonable notice of the principal’s existence.48 However, as in the case of
settlement with the agent, there is case law which indicates that set-off may only be pleaded
against the principal where he was in some way at fault in misleading the third party.49 As
already stated, this must be doubtful: it is difficult to see how the third party can ever rely on the
representation of a person of whom he has not heard.50
Alternatively, under English law, if the undisclosed principal (when discovered) is sued
on the contract by the third party, he cannot set off a claim that he has against the agent,51 nor, it
is submitted, can he plead any other defence that he has against the agent. However, the principal
should be able to plead defences arising out of the transaction between agent and third party.52
Furthermore, he may plead defences personal to himself (such as set-off in his favour against the
third party53), but not defences personal to the agent (such as set-off in favour of the agent54).55 If
these rules are correct, their effect could be extremely beneficial for the third party, whose
position may even be better than it would have been had he sued the agent. It is submitted that
they go beyond what is necessary for his protection.
Here there are therefore differences between the Principles and English law. First, under
the Principles the third party may set up any defences against the principal which he may set up
against the intermediary. This is also the case in English law. In addition, however, it appears
that, by English law, he may set up all defences he would have had against the principal if the
principal had himself made the contract in the same circumstances; this seems to go too far.
Secondly, where the Principles state that the principal may plead against the third party any
defences which the intermediary may set up against the third party, this includes rights of set-off
which the intermediary may invoke against the third party, other defences personal to the
intermediary and defences arising out of the transaction between the intermediary and the third
party. In English law, however, only the last type of defence will apparently succeed; this seems
47
Rabone v. Williams (1785) 7 T.R. 360.
48
Sims v. Bond (1833) 5 B. & Ad. 389, 393; Browning v. Provincial Insurance Co. of Canada (1873) L.R. 5 P.C. 263, 272-73;
Reynolds (1996) pp. 432-33.
49
Cooke & Sons v. Eshelby (1887) 12 App. Cas. 271, 278-79.
50
Also Reynolds (1996) p. 441.
51
Waring v. Favenck (1807) 1 Camp. 85; Kymer v. Suwercropp (1807) 1 Camp. 109; Derham (1996) p. 390.
52
Reynolds (1996) p. 433.
53
E.g. Spurr v. Cass (1870) L.R. 5 Q.B. 656; Reynolds (1996) pp. 433-34; Derham (1996) p. 390.
54
Ibid.
55
Reynolds (1996) pp. 433-34.
to go beyond merely preventing prejudice against the third party. Thirdly, the Principles allow
the principal to plead any defences which the principal may set up against the intermediary.
Again, this includes rights of set-off which the principal may have against the intermediary,
whereas neither this defence, nor any other defences which the principal has against the agent,
will be effective in English law. It is submitted that the approach in the Principles is preferable,
because it balances the conflicting interests of principal and third party in a fairer way. Finally,
English law allows the principal to plead defences personal to himself, such as a right of set-off
in his favour against the third party. This type of defence does not appear in the Principles. It is
submitted, however, that it nevertheless applies, because it is a defence which is not confined to
situations where the third party exercises his actio contraria: this type of defence may always be
invoked by the principal against the third party. It is therefore simply outside the scope of the
Principles.
Assuming that the above statement of the English rules is correct, these differences can
be explained. English law favours the interests of the third party and goes beyond what is
necessary for his protection. By contrast, the Principles take into account the conflicting interests
of the third party and the undisclosed principal and do not go beyond what is necessary to avoid
prejudice to the third party. The balanced (but different) approach in the Principles as regards
defences and set-off may therefore be acceptable. In any case, textbook statements of English
law on these questions may well require restatement or even reconsideration: they are based on
assertion and ancient authorities, some of which may concern disclosed (or at least unnamed)
principles.
3.2.5 Restrictions
3.2.5.1 Express and implied terms of the contract
In English law, there are exceptions to the undisclosed principal’s right to sue and his liability to
be sued. The first exception is said to arise where the terms of the contract expressly or by
implication exclude the principal’s right to sue, and his liability to be sued.56 Accordingly, where
there is an express term of the contract that the agent is the only party to it, there can be no
intervention by the undisclosed principal and it is not possible for the third party to sue the
undisclosed principal.57
More difficult is whether the contract by implication excludes the principal’s right to sue
and his liability to be sued. This implication is sometimes derived from the interpretation of
words descriptive of the agent himself, and of the contract as a whole, that he alone answers the
description in question. It appears from the cases that where the agent is described as being the
‘owner’58 or ‘proprietor’59 the implied exclusion exception may probably be raised, whereas e.g.
56
Siu Yin Kwan v. Eastern Insurance Co. Ltd. [1994] 2 A.C. 199, 207.
57
United Kingdom Mutual Steamship Assurance Assn. v. Nevill (1887) 19 Q.B.D. 110; Rayner (Mincing Lane) Ltd. v.
Department of Trade and Industry [1990] 2 A.C. 418, 516.
58
Humble v. Hunter (1848) 12 Q.B. 310.
59
Formby Brothers v. Formby (1910) 102 L.T. 116
the words ‘tenant’60 or ‘charterer’61 are less likely to do so. Exclusion of the undisclosed
principal by implication of the contract therefore seems to be exceptional. An explanation for
this may be that ‘in an ordinary commercial context’ it may be assumed that a person is ‘willing
to treat as a party to the contract anyone on whose behalf the agent may have been authorised to
contract, unless either the other party manifests his unwillingness or there are other
circumstances which would lead the agent to realise that the other party was not so willing’.62
The above exception is not explicitly mentioned in the Principles. Nevertheless, it is
submitted that the position is the same where the Principles apply. It follows from the
fundamental notion of freedom of contract (which is acknowledged in Art. 1:102 PECL) that the
parties should be able to exclude the possibility of direct actions.
It has been suggested that the exclusion by the express or implied terms of the contract
constitutes the sole exception to the undisclosed principal’s right to sue and his liability to be
sued.63 Such a rule would not, it is submitted, offer much certainty, because it is very vague. It
would be preferable in addition to have clear rules in particular instances. In my view, such rules
can at least to some extent be found in English cases. They are examined in the following
sections.
3.2.5.2 Personal rights
Under English law, is an undisclosed principal unable to intervene where the agent’s rights are
not assignable? This must be the case where the rights of the agent against the third party are
essentially personal.64 It is submitted, however, that this exception is irrelevant in the converse
situation: that is, as regards the rights of the third party against the principal. It is true that where
the third party’s rights against the agent are essentially personal, he cannot assign them. But it
does not follow that it is impossible for him to exercise these rights against the principal. This
point is not always made in the English legal textbooks.
It has also been held in England that a contract which provides that it shall not be
assignable does not preclude intervention by an undisclosed principal.65 This is a rather
inaccurate way of putting things. The rule should be that where the contract stipulates that one or
more obligations under the contract are, solely by virtue of the stipulation, not assignable, this
cannot exclude the principal from exercising his agent’s rights against the third party. One
should distinguish the contractual exclusion of assignment of rights from cases where rights are
essentially personal and are for that reason not assignable. Again, all this is (for the same reason
as in the case of rights which are essentially personal) irrelevant in the converse situation: that is,
as regards the rights of the third party against the agent.
60
Danziger v. Thompson [1944] K.B. 654.
61
F. Drughorn Ltd. v. Rederiaktiebolaget Trans Atlantic [1919] A.C. 203.
62
Teheran-Europe Co. Ltd. v. S.T. Belton (Tractors) Ltd. [1968] 2 Q.B. 545, 555 per Diplock L.J., approved by Lord Lloyd of
Berwick in Siu Yin Kwan v. Eastern Insurance Co. Ltd. [1994] 2 A.C. 199, 208-9.
63
Reynolds (1996) pp. 420-23.
64
Powell (1961) p. 165.
65
Siu Yin Kwan v. Eastern Insurance Co. Ltd. [1994] 2 A.C. 199, 210 per Lord Lloyd of Berwick; Powell (1961) p. 166.
Finally, where rights of the third party against the agent relate to duties of the agent to the
third party which cannot be vicariously performed, it should not, as a matter of logic, be possible
for a third party to sue the principal.66 For example, it would make no sense if the third party was
permitted to sue the principal where the agent bound himself to paint the third party’s portrait. It
does not follow, however, that the undisclosed principal should not be able to sue for the price of
the portrait. Thus, this exception should be irrelevant as regards direct actions by the principal.
These exceptions are not mentioned in the Principles, but it would be contrary to
common sense if they were not also recognised. However, it might not be wise to adopt the
English rule that where a contract provides that it shall not be assignable, intervention by an
undisclosed principal is not precluded: this seems to be contrary to the notion of freedom of
contract (see Art. 1:102 PECL).
3.2.5.3 Personality of the parties and knowledge of the principal
Thirdly, it seems fair that the undisclosed principal is not allowed to intervene where the third
party shows that the undisclosed principal knew or should have known at the time of the contract
that the third party would not have dealt with him.67 It is submitted that it is equally fair to refuse
to allow the principal to intervene where he knows or should have known that the third party
only wanted to contract with his counterparty, the agent.
In Said v. Butt68 the plaintiff twice applied for a theatre ticket for a first-night
performance, but his application was refused by the proprietors of the theatre as in the past he
had strongly criticised their conduct. He therefore sent a friend to the box-office to buy a ticket
for him without disclosing his name, but he was later refused admission by the manager of the
theatre. In an action against the manager for inducing breach of contract, McCardie J.69 held that
there was no contract between the plaintiff and the proprietors. This was apparently on the
ground of mistake as to the person: they reserved the right to sell first-night tickets to specially
selected persons, so that the ‘personality’ of the other contracting party was a material element in
the contract. But that ground is a doubtful one. Mistake reasoning is valid only if one assumes
that the undisclosed principal is a party to the contract. This does not seem to be the case: he is
rather a third party that the law allows to intervene. If this is true, there cannot be any mistake as
to the person, because the agent is the person with whom the third party contracts and the person
with whom he intended to contract.70
Another case, Dyster v. Randall & Sons,71 appears to take a different approach. In that
66
The same rule seems to have been stated (rather inaccurately) in Siu Yin Kwan v. Eastern Insurence Co. Ltd. [1994] 2 A.C. 199,
210 per Lord Lloyd of Berwick. Also Goodhart and Hamson (1932) pp. 338-45; Powell (1961) p. 165. Contra: Reynolds (1996)
p. 421.
67
Treitel (1995) p. 648. Contra: Reynolds (1996) p. 422, where it is said that such a rule may be a fair one, but that it can only be
justified on grounds of being an exception to an admitted anomaly, designed to prevent that anomaly from going too far and
interfering with commercial convenience for which it arose. In my opinion, to accept this rule would not interfere with
commercial convenience at all.
68
[1920] 3 K.B. 497.
69
p. 498 et seq.
70
Reynolds (1996) p. 422.
71
[1926] Ch. 932.
case, an undisclosed principal had bought land through an agent which he knew the owner would
not sell to him. The undisclosed principal was nevertheless held entitled to specific performance
on the ground that the contract was assignable.
It is therefore unclear whether this third type of exception is accepted in English law. But
it is submitted that it should be accepted on the basis that it is unfair that a person should be able,
by means of an undisclosed agent, indirectly to force himself upon a party who is unwilling to
deal with him (or who only wants to deal with the undisclosed agent).
The Principles should, it is submitted, also accept this exception. The undisclosed
principal should not be allowed to exercise his actio directa where he knows or should know at
the time of the contract that the third party would not have dealt with him (or where he knows or
should know that the third party only wants to deal with the agent). The basis for this exception
would be that such intervention would be contrary to good faith and fair dealing (Art. 1:201
PECL).72
For similar reasons, it is submitted that an exception should also be recognised both by
English law and under the Principles in the converse situation. That is, the third party should also
not be entitled to sue the undisclosed principal where the principal knows or should have known
at the time of the contract that the third party would not deal with him (or where he knows that
the third party is unwilling to deal with anyone else than the agent). There are no English cases
on this situation but it is submitted that such an action should not be possible. Where a third
party is truly unwilling to deal with the principal or only willing to deal with the agent, he should
take the full consequences of this unwillingness and he should therefore not be allowed to sue the
principal. The same should be true where the Principles apply, because (for the same reasons)
exercise of the actio contraria by the third party in such situations seems to be contrary to good
faith and fair dealing in the sense of Article 1:201 PECL.
It is therefore suggested that the Principles will probably produce the same results as
English law does or should do so that the Principles should be acceptable for English lawyers in
this respect also.
3.2.5.4 Personality of the parties and knowledge of the agent
A further exception was recognised in Siu Yin Kwan v. Eastern Insurance Co. Ltd:73 where the
agent knows or should know that the third party is unwilling to contract with anyone other than
himself, the undisclosed principal cannot intervene. Lord Lloyd of Berwick said:74 ‘... Axelson
were entitled to sue as undisclosed principals unless Richstone [the agent, DB] should have
realised that the insurers [the third party, DB] were unwilling to contract with anyone other than
themselves.’ There seems to be no good reason why this exception should not be extended to
cases where the agent knows or should know that the third party is unwilling to contract with his
72
On good faith and fair dealing in the Principles: Lando and Beale (1995) pp. 53-58. The exception here discussed is not very
likely to arise in cases involving commission agents. Where a third party deals with a commission agent he normally knows that
there is a principal behind him. He may even know who the principal is. But even where he does not, this exception should not
apply, because the third party, by dealing with a commission agent, simply runs the risk that there is somebody behind him with
whom he would not be willing to deal.
73
[1994] 2 A.C. 199.
74
At p. 208.
principal.75 There will, of course, be considerable overlap between cases falling within the
category discussed in 3.2.5.3 and this category, because they are by no means mutually
exclusive: it is perfectly possible that both the undisclosed principal and the agent know or
should know that the third party is only willing to deal with the agent or that he is not willing to
deal with the principal.
What is the position under the Principles? An exception similar to that accepted in
English law is not explicitly mentioned. Nevertheless, the same result may be reached by virtue
of Article 4:103 PECL, which enables the third party to avoid the contract or use it as a defence
against intervention of the undisclosed principal where he has made a mistake of fact or law.76
Where the third party thinks that his counterparty acts as principal, whereas he is in fact an
intermediary who acts on behalf of an undisclosed principal, the third party may be said to be in
error as to a ‘fact’ in the sense of Article 4:103(1) PECL. Where the intermediary knew or ought
to have known that the third party was only willing to contract with him (the agent) or was not
willing to contract with the principal, it should be contrary to good faith and fair dealing for the
intermediary to allow the third party to proceed in error (Art. 4:103(1)(a)(ii) PECL). In such a
case the agent knows or should know that the third party, had he known the truth, would not have
entered into the contract (Art. 4:103(1)(b) PECL). As a result, the third party should be entitled
to avoid the contract or to use the mistake as a defence against agent or undisclosed principal.
In English law, an undisclosed principal should be able to invoke this exception where he
is sued. Again, it is submitted that where a third party is truly unwilling to deal with the principal
or only willing to deal with the agent, he should take the full consequences of this unwillingness:
he should not be allowed to sue the principal.
In the Principles, the position seems to be as follows. By virtue of Article 4:103 PECL
the contract is voidable. This means, that the third party will not be able to exercise the actio
contraria once the contract is avoided.
Thus, again, via different routes, the Principles and English law probably reach much the
same results.
3.2.5.5 Misrepresentation
A fifth exception exists under English law where the contract is procured by a misrepresentation,
whether fraudulent, negligent or innocent, by an agent or any other person.77 In such a case, the
third party may have a defence to an action upon it,78 and may be able to rescind it.79 This is not,
however, a situation where the intervention of the principal is excluded: the contract is simply
unenforceable by anyone against the third party. Non-disclosure may sometimes constitute
75
Some support for this assumption may be found in the judgment of Diplock J. in Teheran-Europe Co. Ltd. v. S.T. Belton
(Tractors) Ltd. [1968] 2 Q.B. 545 at p. 555, which was approved by Lord Lloyd of Berwick in Siu Yin Kwan v. Eastern
Insurance Co. Ltd. [1994] 2 A.C. 199, 208-9. As to commission agents, the remarks made in note 72 apply here mutatis
mutandis.
76
On mistake as to facts or law: Text & Comments (1996) pp. 93-99.
77
See the famous case Hedley Byrne & Co. v. Heller & Partners [1964] A.C. 465, which clearly acknowledges the possibility of
misrepresentation by a third party.
78
Archer v. Stone (1898) 78 L.T. 34.
79
Garnac Grain Co. Inc v. H.M.F. Faure & Fairclough Ltd. [1966] 1 Q.B. 650 at first instance.
misrepresentation in the rare cases where there is a duty to disclose, but normally failure to
mention the principal’s existence does not without more constitute misrepresentation.80
This exception may overlap with other exceptions. For example, the agent who states that
he is not acting as an agent for a person with whom the third party is unwilling to deal may be an
agent who knows or should know that the third party is unwilling to deal with his principal
(above, 3.2.5.4). In addition, it may be possible that the principal knows or should know that the
third party is unwilling to deal with him (see 3.2.5.3).
In the Principles, misrepresentations are dealt with in Article 4:107 PECL. The third
party may avoid the contract when he has been led to conclude it by the intermediary’s or any
other person’s fraudulent representation (whether by words or conduct), or fraudulent
non-disclosure of any circumstance which according to reasonable standards of good faith and
fair dealing, he should have disclosed. This extent of the exception in the Principles is both wider
and narrower than the misrepresentation exception in English law. It is broader because it covers
cases of non-disclosure. But it is narrower in that it is confined to fraudulent representation and
does not deal with innocent or negligent misrepresentation.
It thus appears that there are significant differences between the scope of this exception in
the Principles and in English law. Nevertheless, it is submitted that these differences are not
material in the context of agency. Under both the Principles and English law, a principal who
makes a fraudulent misrepresentation is deprived of his right to exercise his actio directa. And
the Principles may reach similar results even in other cases, because the misrepresentation
exception overlaps with others. For example, even if a case falls within the misrepresentation
exception under the Principles, but outside the exception in English law (for example, because it
is a case of fraudulent non-disclosure), the direct action may be excluded by another exception
which is recognised in English law.
Thus it seems, once again, that the apparent differences between the Principles and
English law should not render the Principles unacceptable to English lawyers.
3.2.5.6 Rights acquired on the principal’s behalf
A sixth exception, contained in Article 3:302(b) of the Principles is that the principal may only
exercise against the third party the rights acquired by the intermediary on the principal’s behalf.
This accords with common sense. It means, for example, that the principal is not allowed to sue
for the agent’s commission. This restriction will presumably be acceptable to English lawyers.
3.2.6 The right of election
In undisclosed principal cases under English law, it is probably81 the case that the agent and
principal are alternatively liable on the contract. It is said that the third party may lose his right to
sue one of them on the ground that he has ‘elected’ to hold the other liable.82 The question then
arises: what constitutes election? Probably, a binding election is constituted only by judgment. 83
80
Reynolds (1996) p. 423.
81
This is not entirely clear. Reynolds (1996) pp. 446-48.
82
Ibid., pp. 454-55, 457-58; Treitel (1995) p. 653.
83
Reynolds (1996) pp. 447, 451.
Only two cases are known where it was held that there had been a binding election short of
judgment.84 It seems preferable to explain these cases on the basis that a third party should only
be debarred from suing an undisclosed principal - short of an actual judgment against the agent by an act which raises an estoppel against him. Examples are where after discovery of the
principal he does an act leading the principal to suppose that he relied on the agent, or is paid by
the agent, or in some other way waives the liability of the principal in a manner relied on.85 In
any event, it is clear that a third party who obtains judgment against agent or principal cannot sue
the other, even though the judgment is not satisfied.
The Principles do not provide an answer to the question whether a third party is barred
from pursuing intermediary or principal where he has exercised his rights against the other, but is
not able to recover the full amount from that other. It is, however, necessary that they take a
position and it is disappointing that they do not do so. It is doubtful whether the current position
under English law would be an appropriate one for the Principles to adopt. The English doctrine
of election is criticised in legal literature.86 It is, in particular, hard to see why one party should
be released merely because the third party has elected to hold the other liable. Only satisfaction
of the claim should be a bar, unless the behaviour of the third party raises an estoppel. It would
be useful to incorporate such a rule into the Principles. However, it is unnecessary to introduce
the notion of estoppel, because the fundamental principle of good faith (Art. 1:201 PECL)87
would produce the same result. If the third party sought to exercise the right to sue either
principal or intermediary in circumstances which would raise an estoppel, the third party could
be held to be acting contrary to good faith and fair dealing (see Art. 1:201 PECL).
It is therefore suggested that neither English law nor the Principles are wholly acceptable
on this point. Both would benefit from reformulation. This would require the abandonment of the
‘judgment’ rule in English law, which seems to have little to commend it.
4. The position of the commission agent
4.1 General
‘Commission agent’ is a convenient shorthand for a person who, in the terminology of
continental jurisdictions, ‘acts on behalf of his principal but in his own name’.88 Such a person
does not have authority to create privity of contract between his principal and third parties with
which he (the agent) deals. He can only contract in a personal capacity. If he does contract with
the third party, the effect is that he (the agent) and the third party become contractually bound to
each other. No contractual relationship is created between third party and principal. Direct
actions between third party and principal are only permitted under the conditions already
84
MacClure v. Schemeil (1871) 20 W.R. 168; Smethurst v. Mitchell (1859) 1 E. & E. 622.
85
Reynolds (1996) p. 455.
86
Ibid., p. 446; Treitel (1995) p. 653.
87
On good faith and fair dealing: Lando and Beale (1995) pp. 53-58.
88
See section 2.
described.89
It is unclear whether English law recognises the possibility of ‘commission agency’.
There are two key elements to the concept. First, the agent does not have authority to create
privity of contract between his principal and third parties. Secondly, if the agent does contract
with third parties, the result is a contract between him (the agent) and the third party, not
between his principal and the third party, with the result that in general90 principal and third party
cannot sue each other.
There have been said to be three lines of authority in English law.91 One line of case
suggests that such ‘commission agency’ can be created.92 A second group has been said to
suggest that, even where an intermediary does not have authority to create privity, he will be an
ordinary agent of an undisclosed principal and the undisclosed principal rules will apply. Thus
the principal can sue the third party (and be sued by him), whatever the parties’ intentions. A
final group of cases is said to indicate that where an intermediary does not have authority to
create privity, there is no agency at all. The principal must alone be party to any contract and
must deal with his principal as principal.
The following sections analyse the leading cases which tend to favour and to negate the
possibility of ‘commission agency’ in English law, in order to ascertain whether English law
really is unclear on the point. The broader implications of the analysis are then considered in the
final section (4.4).
4.2 Cases supporting the possibility of ‘commission agency’ in English law
The starting point of our discussion must be the judgment of Blackburn J. in Ireland v.
Livingston.93 In this case, the defendant (a merchant at Liverpool) instructed the plaintiff
(merchants and commission agents at Mauritius) to buy sugar on the defendant’s behalf. The
defendant refused to accept the 400 or so tons of sugar which the plaintiff had arranged, on the
ground that he had required between 450 and 500 tons. The plaintiffs claimed that the defendant
was not entitled to refuse to accept the sugar: the amount of sugar in the defendant’s order was
only a maximum and they were only obliged to use due diligence to fulfil the order. Blackburn J.
resolved the dispute by (in effect) recognising a concept of ‘commission agency’. He said, that
the order named a limit and that therefore the plaintiff did not bind himself absolutely to supply
the goods, but merely accepted an order, by which he bound himself to use due diligence to fulfil
it, so that he was bound only to get the goods as cheaply as he reasonably could. Furthermore,
the defendant paid the plaintiff commission, so that the latter did not take upon himself any part
of the risk or profit which might arise from the rise and fall of prices. Therefore, as between
plaintiff and defendant there was a contract of agency not sale, and the defendants were not
entitled to refuse the 400 tons of sugar because the plaintiff was not in breach. However, as
89
See section 3.2.
90
But see section 3.2 on Articles 3:302-304 PECL.
91
Reynolds (1996) pp. 11-12, 412-14; Reynolds (1983) p. 130.
92
As to which especially Hill (1968) p. 623.
93
(1872) L.R. 5 H.L. 395.
between the plaintiff and the seller there was a contract of sale: the seller supplied the goods to
the plaintiff and not to his unknown foreign principal so that there was no privity between the
defendants and the seller.94 This judgment clearly acknowledges the notion of ‘commission
agency’.
The difficulty with Blackburn J.’s decision is that he does not convincingly explain why
no privity of contract was created between third party (the seller) and principal (the defendant)
on the facts. The only reason he offers is that the sellers intended to sell to the plaintiff. But this
is not a satisfactory explanation. The seller knew that the plaintiff was buying on behalf of a
foreign principal. Thus, the defendant was a disclosed principal (whether named or unnamed)
and should in principle have been able to sue the seller on the contract which would arise
between them.
An alternative and preferable explanation is suggested by subsequent decisions. That is
that the reason why no privity of contract arose between seller and defendants was that the
plaintiff (the agent) did not have authority to create privity between the defendant (the principal)
and the seller (the third party). Ireland v. Livingston95 involved a foreign principal. In Hutton v.
Bulloch96 it was said that a foreign principal does not usually give his English agent authority to
create privity between himself and the third party.97 Blackburn J. agreed with this analysis in his
dissenting opinion in the famous case Robinson v. Mollett.98 Ireland v. Livingston could
therefore be explained as a case in which it was presumed that the defendants (foreign principals)
had not given authority to create privity between themselves and the seller (third party). In
Robinson v. Mollett 99Blackburn J. said:
Any person, if he chooses, may give an order to an agent to buy as his agent, not only
with an express dispensation from any obligation to establish privity of contract between
him and the person from whom the agent buys, but even expressly refusing authority to
the agent to establish such privity.
This is the ordinary authority given to a foreign commission merchant who (on account
of the great inconvenience which would result from establishing privity of contract
between the foreign producer and the home merchant) is not allowed (far less required) to
establish privity of contract between them ... This, however, in no way interferes with the
existence of a fiduciary duty ...
These foreign principal cases suggest that whether ‘commission agency’ can exist depends in the
first place on whether the principal gave his agent authority to create privity of contract between
himself (the foreign principal) and third parties. Whether this authority is given is, in principle, a
94
At pp. 407-9.
95
(1872) L.R. 5 H.L. 395.
96
(1874) L.R. 9 Q.B. 572.
97
At p. 576 per Brett, J.
98
(1875) L.R. 7 H.L. 802, 810.
99
At pp. 809-10.
question of fact. However, there was once a strong presumption that a foreign principal did not
give his agent such authority (the ‘foreign principal doctrine’). That presumption was rejected in
Teheran-Europe Co. Ltd. v. S.T. Belton (Tractors) Ltd.100 In that case, Diplock L.J. said that
three conditions had to be satisfied in order to create privity between principal and third party.
First, the principal must have given his agent authority to create privity. That is a question of fact
in relation to foreign principals also.101 Secondly, the agent must intend at the time of the
contract to enter into the contract with the third party on behalf of the principal.102 Finally, it
must be determined whether or not the third party was willing, or led the agent to believe that he
was willing, to treat as a party to the contract the agent’s principal, and, if he was so willing,
whether the mutual intention of the other party and the agent was that the agent should be
personally entitled to sue and liable to be sued on the contract as well as his principal.103
It is submitted that Diplock L.J.’s judgment indicates that ‘commission agency’ could be
created under English law. The first prerequisite will be that the principal has not given his agent
authority to create privity between him (the principal) and the third party. To ensure that this is
the case, it may be wise to conclude the contract of agency in writing and to include a provision
which unequivocally states that the principal does not give his agent any authority whatsoever to
create privity between him (the principal) and the third party. But this is unlikely to be a
sufficient basis for ‘commission agency’. Even though the principal does not actually grant
authority to create privity to his agent, he may still be treated as having granted such authority
under the doctrine of ‘apparant authority’. In that event, the principal could be sued (and could
sue) as a party to a contract with the third party. To avoid this, the principal should expressly
require his agent to include in contracts which he is instructed to make with third parties a
provision that he (the agent) is the only principal. This will exclude any right which the third
party might otherwise acquire to sue the agent’s principal.104 A final prerequisite is that the agent
must, at the time of the contract, intend to contract on the principal’s behalf. Unless the agent has
such intention at that time, he will contract personally and there will be no agency at all. But it is
submitted that this requirement will normally be satisfied.
4.3 Cases opposed to the possibility of ‘commission agency’ in English law
The first important case which has been said to suggest that ‘commission agency’ could not be
created in English law is Maspons y Hermano v. Mildred, Goyeneche & Co.105 The case is said
to be authority for the proposition that, even if an intermediary does not have authority to create
privity, he will nevertheless be a normal agent of an undisclosed principal. The undisclosed
principal rules will apply and the principal will (as a rule) be entitled and liable whatever the
100
[1968] 2 Q.B. 545.
101
At p. 555.
102
At p. 556.
103
At pp. 556 and 558.
104
See 3.2.5.1.
105
(1882) 9 Q.B. 530; affd (1883) 8 App. Cas. 874.
intention of the parties.106 The facts of the case were as follows. The defendants, an English firm,
traded with Demestre Chia & Co. (‘the intermediaries’), ‘shipping agents, bankers and
importers’ in Havana, Cuba. The plaintiffs, who were Spanish merchants at Havana, consigned a
cargo of goods to the defendants through the agency of the intermediaries. The defendants knew
that the latter were acting for a party that was alluded to as ‘interesado’, but the name of the
plaintiffs was not disclosed. The defendants insured the cargo in London at the request of the
intermediaries. The ship was subsequently lost and the policy money was paid to the defendants.
The ‘interesado’, Maspons y Hermano, intervened to claim the money. Spanish law applied in
Cuba at the time. On the basis of provisions of the Commercial Law of Spain ‘commission
agency’ was possible. However, Lindley L.J. said:107
The Spanish law appears to us to be a circumstance to be taken into account in
considering the nature and extent of the authority given by the plaintiffs to Demestre &
Co.; but the Spanish law is not, in our opinion, material for any other purpose. The
contract between Demestre & Co. and the defendants is governed by English law, not
Spanish, and the persons who can sue and be sued on that contract in England must also
be determined by our law, and not by the law of Spain.
Consequently, applying English law, the plaintiffs could sue the defendant as undisclosed
principals (although they were unnamed rather than undisclosed).
It is submitted that Maspons y Hermano does not suggest that the undisclosed principal
doctrine will apply even where the principal did not give his intermediary authority to create
privity of contract. The passage quoted merely states that Spanish law is one of the
circumstances which has to be taken into account in determining the nature and extent of the
authority which the principal granted, but that the effects of the authority vis-à-vis the third party
must be determined by English law. It does not address the question whether authority to create
privity was in fact granted. There is another passage in Lindley L.J.’s judgment which says that
the foreign principal doctrine did not apply to the facts of the case. Lindley L.J. states that the
doctrine produces the rule that a foreign principal does not give his agent authority to create
privity.108 This clearly shows that in Maspons y Hermano the principal was taken to have given
his agent authority to create privity. On that basis, the case is reconcilable with the existence of
‘commission agency’.
There is a second group of cases which have been said to indicate that ‘commission
agency’ could not be created in English law for a different reason. The idea is that if an
intermediary has no authority to create privity of contract between his principal and third parties,
the undisclosed principal rules do not apply at all. The agent must alone be a party to the contract
he has performed for the principal, and deal with his principal as principal. Such an approach can
be found in the dissenting opinion of Diplock L.J. in Anglo-African Shipping Co. of New York
Inc. v. J. Mortner Ltd.,109 in which the court had to decide what the rights and duties are of a
106
Reynolds (1983) p. 130.
107
At p. 539.
108
At pp. 541-43.
109
[1962] 1 Lloyd’s Rep. 610.
confirming house. Diplock L.J. seems to assume that because a confirming house has no
authority to create privity between the importers and the seller, the relationship between the
confirming house and the importers cannot be a relationship of agency.110 His Lordship
expressed the same view in a different context in Garnac Grain Co. Inc. v. H.M.F. Faure &
Fairclough Ltd.111 He clearly denied the existence of indirect agency: there is direct agency or no
agency at all.
4.4 The implications of an analysis of the case law
It is therefore not wholly clear whether English law recognises a concept of ‘commission
agency’. And because the proper legal analysis under English law of cases where intermediaries
do not have the authority to create privity of contract is uncertain, it is unclear what principles
govern the relationships between principal, intermediary and third party in such situations.
Adoption of the Principles could therefore make a positive contribution to the development of
English law in this area in two respects. First, it would facilitate recognition of the concept of
‘commission agency’ in England. Even though few English intermediaries may operate on such
basis, it would be beneficial if the option of doing so were available to them.112 Secondly, the
Principles should provide a clear and acceptable body of rules to govern cases where
intermediaries do not have authority to create privity. Under the Principles ‘commission agency’
is a clear example of indirect representation, and the rules governing indirect representation are
(as we have seen) substantially the same as the rules which English law already accepts for
undisclosed principals.
5. Conclusions
This article has been concerned to ascertain whether the provisions of The Principles of
European Contract Law on indirect representation could be acceptable in England. The
description of indirect representation in Article 3:102(2) of the Principles covers two types of
case: ‘undisclosed agency’ and ‘commission agency’. Each appears at first sight to pose
difficulties for English law.
The apparent difficulty in cases of ‘undisclosed agency’ is that English law and the
Principles proceed from radically different starting points. Under English law, undisclosed
principal and third party are generally allowed to sue each other. By contrast, the starting point
under the Principles is that they are not entitled to do so. Closer examination of the rules
nevertheless revealed that an application of English law and the Principles would generally
produce much the same results. There are some differences. The major difference seems to be
that, under English law, where the undisclosed principal is sued by the third party he may not
plead the defences which he has against the agent, whereas he may do so under the Principles.
Nevertheless, it was argued that the Principles provide a more balanced approach which takes
110
At p. 621.
111
[1966] 1 Q.B. 650.
At present a document, said to be devised by accountants, known as the ‘commissionaire agreement’, circulates in London. It
is, however, used for tax purposes.
112
into account the conflicting interests of principal and third party. As the Principles offer a
preferable rule, that difference should not render the Principles unacceptable for England.
The apparent difficulty in cases of ‘commission agency’ is a different one: that it may be
unclear whether the continental concept of a ‘commission agent’ is recognised in English law.
An analysis of English case law confirmed these doubts. But that should not render the Principles
unacceptable in England. The Principles should provide an appropriate body of rules for those
who wish to adopt, for whatever reason, a concept of ‘commission agency’ to structure their
transactions.
Appendix
Principles of European Contract Law
Article 3:301: Intermediaries not Acting in the Name of a Principal
(1)
Where an intermediary acts
(a) on instructions and on behalf of, but not in the name of, a principal, or
(b) on instructions from a principal but the third party does not know and has no reason to
know this,
the intermediary and the third party are bound to each other.
(2)
The principal and the third party become bound to each other only under the conditions
set out in articles 3:302 to 3:304.
Article 3:302: Intermediary’s Insolvency or Fundamental Non-performance to Principal
If the intermediary becomes insolvent, or if he commits a fundamental non-performance to the
principal, or if prior to the time for performance it is clear that there will be a fundamental
non-performance when it becomes due,
(a) on the principal’s demand, the intermediary shall communicate the name and address
of the third party to the principal; and
(b) the principal may exercise against the third party the rights acquired on the principal’s
behalf by the intermediary, subject to any defences which the third party may set up
against the intermediary.
Article 3:303: Intermediary’s Insolvency or Fundamental Non-performance to Third Party
If the intermediary becomes insolvent, or if he commits a fundamental non-performance to the
third party, or if prior to the time for performance it is clear that there will be a fundamental
non-performance when it becomes due,
(a) on the third party’s demand, the intermediary shall communicate the name and
address of the principal to the third party; and
(b) the third party may exercise against the principal the rights which the third party has
against the intermediary, subject to any defences which the intermediary may set up
against the third party and those which the principal may set up against the intermediary.
Article 3:304: Requirement of Notice
The rights under articles 3:302 to 3:303 may be exercised only if notice of intention to exercise
them is given to the intermediary and to the third party or principal, respectively. Upon receipt of
the notice, the third party or the principal is no longer entitled to make performance to the
intermediary.
Sale of Goods Act 1979
Section 31(2): Instalment Deliveries
Where there is a contract for the sale of goods to be delivered by stated instalments, which are to
be separately paid for, and the seller makes defective deliveries in respect of one or more
instalments, or the buyer neglects or refuses to take delivery of or pay for one or more
instalments, it is a question in each case depending on the terms of the contract and the
circumstances of the case whether the breach of contract is a repudiation of the whole contract or
whether it is a severable breach giving rise to a claim for compensation but not to a right to treat
the whole contract as repudiated.
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