RELATIONSHIP WITH THIRD PARTIES; DISCLOSED PRINCIPAL

CONTENTS

1.0      Introduction

2.0      Objectives

• Main content
• Contracts by Agents
• Principal and Third Party
• Effect of Agency on Disclosed Principal

4.0      Conclusion

5.0      Summary

6.0      Tutor-Marked Assignment

7.0      References/Further Readings

INTRODUCTION

Under the law of agency, the principal is generally responsible to third parties for any decision, act  or  omission  of  his  agent  which  was  performed  or  taken  while executing the terms of the agency. This is the hallmark of the law of agency on  a disclosed principal.

OBJECTIVE

The main objective of this unit is to expose the learner to the peculiar  relationship  between  a  principal  and  an  agent  and  its  effects   on   a contract  executed  by the  third party in favour of  the  principal  where the  principal  is disclosed  by the agent  to the third party at the time of the contract.

MAIN CONTENT

The main content of this unit on the nature of contracts  executed by the agent in  favour  of the principal with a third party who, at the time of the contract was aware to the existence of the said principal.

Contracts by Agents

Generally, issues in contracts by agents raise  the  fundamental  problem of who can sue  and who can be sued. between the principal or the agent. In either case, the rights and liabilities attaching to each depend on the following factors:

• Whether the agent acted within the scope of his authority; express or implied.
• Whether the principal is disclosed or undisclosed
• Whether the principal is a national as opposed to a foreign principal

Where the agent acted within the scope of his authority, or if without authority, it has been subsequently ratified by the principal, and the identity of  the  principal  disclosed,  the latter alone is generally the true party to the contract  and  bound  thereby.  The  agent  incurs neither right nor liability under  such  a  contract  unless  otherwise  expressly  made a party thereto.

Lord Erskin stated the position of the law clearly in Ex Parte Hartrop (1806)12 Ves 349  when he said:

“No rule of law is better ascertained or stands upon a stronger foundation than  this; that, where an agent names his principal, the  principal  is  responsible,  not  the agent; but for the application  of that rule, the agent  must  name his principal  as the person to be responsible.”

It is however, not necessary that the agent must specifically have stated that he was acting for and on behalf of his principal in order for the latter to be disclosed. It  is  sufficient  if the third  party knows  or ought to  have known  that  the  person  he  was  dealing   with was acting for another specific person.

However, where the principal is undisclosed,  that is, where the fact of agency as well as  the identity of the principal are not known to the third party, the contract  may,  as  a general rule, be enforced by or against  the principal if and when disclosed provided  that the agent’s act was authorized. See Watteau v. Fenwick (1893)1 Q.B.D 346 .

SELF ASSESSMENT EXERCISE 1

Briefly examine the nature of contracts entered into on behalf of  a disclosed  principal, with a third party.

Principal and Third Party

The general rule is that where a person contracts as agent for a principal the contract is the contract of the principal and not that of the agent, and prima-facie, at common law  the only person who may sue is the principal, and the only person who can be sued is the principal.

In other words, everyone is liable for his contract even where he acts for another unless it can be shown that this liability is removed by the operation of that contract.

The relationship between the disclosed principal and  the  third  party will be brought to life and the principal could take advantage there from only  under  the  following situations:

• The agent discloses,    named    or    unnamed    the    existence    of    a principal on whose behalf the contract was negotiated
• The agent acts within actual authority
• The agent acts without authority but the principal subsequently ratifies same

Generally, the principal may be sued on the contract if the agent acts within apparent authority but the third party cannot be  sued  without  firstly  ratifying  the  act of  the agent.

In response to a claim by the disclosed principal, the third party has the defences.

• He can set up and use any defense or claim arising from the contract
• He may also use any defense available against the principal

It is however to be noted that a defense or claim available against the agent and unconnected with the contract cannot be used against the principal.

SELF ASSESSMENT EXERCISE 2

What rights are available to both the principal and third party  in  an agency situation where the principal is disclosed?

Effects of Agency on Disclosed Principal

In  Barwick  v.  English  Joint  Stock  Bank  (1967)  L.R,  2 Exch. 259. Wiles. J. stated  the rationale behind this issue thus:

“The principal put the agent in his place to do that class of acts,  and  he  must  be  answerable  for  the  manner  in which that agent has conducted himself in doing the business which it was the act of his master to place him in.”

The principal is only liable for  those  decisions,  acts  or  commissions which fall within the scope of the real (actual) or apparent (ostensible) authority of the agent.

The  crucial  test  is  therefore  whether  a  particular  decision,  act  or omission   falls within the scope of the agent’s authority  and  done  or  taken  in  the  course  of  that agent’s employment.

Therefore, in as much as the third  party  dealt  with  the  agent  in  good  faith,  the principal does not cease to be liable by reason only of the fact that the agent was acting fraudulently or otherwise to the detriment of the principal.

Generally, the effect of an agency relationship created by an agent on  behalf  of  a disclosed principal with a  third  party  is  that  the  disclosed principal  is bound in respect of the contract so created.

SELF ASSESSMENT EXERCISE 3

A disclosed principal is bound by contracts entered to on his behalf. Do you agree?

CONCLUSION

This unit has exposed the learner to the understanding of the nature of relationship that exists between an agent and a third party in a situation where  there  is  a  disclosed principal.

SUMMARY

By the end of this unit you should be able to understand:

1. The nature of contracts entered  into by agents with a third party on behalf  of a disclosed principal
2. The extent of the liabilities or otherwise of the principal in a disclosed principal’s contract entered into by an agent on the principal’s behalf with a third party.
3. The effect of such contract on all the parties concerned.

TUTOR-MARKED ASSIGNMENT

1. Who is a disclosed principal?
2. State the rights available to both the principal and a third party in a disclosed principal’s agency
3. Contracts entered into on behalf of a disclosed principal are enforceable against the principal. Do you agree?

REFERENCES/FURTHER READINGS

Kingsley Igweike, (1993). “Nigeria Commercial Law: Agency.”  Jos,  Nigeria: FAB Educational Books.

Pollock and Maitland. “The History of English Law,” Vol. 11.

Walker, D.W. (1980). “The Oxford Companion to Law.” London: Butterworths.

American Restatements, Second, Agency, Article.

Friedman, G.H.L. (1984). Law of Agency, 7th Edition. London: Butterworths.

Companies and Allied Matters Act (1990). Laws of the Federation of Nigeria.