Undisclosed Principal in Agency Law: When a Hidden Player Steps In
Agency law usually works on a simple idea: the agent makes it clear they are acting on behalf of a principal. But what if the agent does not reveal this? What if the third party believes they are contracting with the agent directly, only to discover later that someone else—the undisclosed principal—was behind the deal?
This creates one of the most intriguing areas of commercial law: the doctrine of the undisclosed principal.
What Is an Undisclosed Principal?
An undisclosed principal is a person or business that authorizes an agent to make a contract without revealing the existence of the agency relationship to the third party.
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At first, the contract is strictly between the agent (A) and the third party (T).
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Later, the principal (P) may step in to enforce the contract or be held liable for it.
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Likewise, once T learns about P, T can elect to sue either A or P if there is a breach.
This is unusual, because contract law usually rests on the agreement of two identified parties. Yet courts have allowed this doctrine for reasons of commercial convenience.
As Lord Lindley once explained, in many contracts it simply doesn’t matter whether the person behind the agreement is disclosed or not.
Example
Imagine a tech consultant in Berlin negotiating a licensing deal with a software company. The company believes it is contracting with the consultant personally. In reality, the consultant is acting for a U.S. venture capital firm.
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If the contract is profitable, the undisclosed principal (the VC firm) can step in to enforce it.
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If there is a breach, the third party (software company) can choose to sue the consultant or the VC firm.
This flexibility helps in practice, but it can also feel unfair to the third party—who never realized they were entering into a contract with a hidden counterparty.
Excluding the Application of the Doctrine
The law recognizes that there are situations where allowing an undisclosed principal to intervene would be unfair. Courts have therefore limited the doctrine in certain cases.
1. Contract Terms Exclude It
If the contract explicitly states that only the named party is bound, then no principal can later intervene.
2. Agent Does Not Intend to Act as Agent
If the agent never intended to represent anyone, then the principal cannot later claim rights under the contract.
3. Third Party Wants to Contract Only with the Agent
If the third party makes it clear they want to deal only with the person in front of them—and no one else—the principal is excluded.
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Example : A startup founder agrees to a consulting deal because of the personal skills of the consultant. Later, a hidden principal cannot enforce that deal, since the contract was based on trust in the consultant’s abilities.
4. Agreement Between Principal and Agent
Sometimes the principal and agent agree in advance that the agent will contract in their own name, not as a representative. In this case, the principal is excluded from enforcing the contract.
Courts’ General Approach
Despite these limits, courts often lean toward allowing undisclosed principals to intervene, especially in commercial transactions, unless there is strong evidence that the third party would never have agreed to contract with anyone else.
This reflects a balance between protecting commercial convenience and respecting the expectations of the third party.
Key Takeaway:
The doctrine of the undisclosed principal shows how agency law sometimes bends traditional rules of contract for practical reasons. But it also creates uncertainty—especially in modern commerce, where personal expertise, trust, and branding often matter as much as the deal itself.
Undisclosed Principal: Payments, Defences, and Third-Party Choices
Settlement by the Principal Paying the Agent
When an agent acts on behalf of an undisclosed principal, what happens if the principal pays the agent, but the agent fails to pay the third party?
Imagine a tech startup, NeoTech Ltd, wants to buy specialized servers from a supplier, ServerWorld Co, but wants to keep its identity secret because revealing the startup might affect negotiation leverage. NeoTech appoints an agent, Alex, to handle the purchase. Alex receives the payment from NeoTech but never pays ServerWorld.
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Traditionally, courts have held that the third party (ServerWorld) cannot claim the money from the principal if it was not aware of the principal’s existence at the time of the transaction.
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The rationale is that ServerWorld only trusted the agent’s creditworthiness, not NeoTech’s. Holding the principal liable would create an unfair surprise.
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Some later rulings questioned this strict approach, suggesting that if the third party reasonably relied on the agent acting on behalf of a principal, justice may favor allowing recovery.
This principle highlights the risks third parties face when dealing with agents who may be acting secretly for others.
Defences Available to the Third Party
An undisclosed principal stepping into a contract steps into the agent’s shoes. This means that any defences or claims the third party could raise against the agent can also be used against the principal.
Example: Suppose EcoWear Ltd buys fabrics through an agent, Jordan, from TextileHub, believing Jordan is the principal. If TextileHub claims payment for damaged fabrics, EcoWear can argue “we already offset part of the debt due to previous defective shipments”, the same defence it could have used against Jordan.
Key points:
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Defences apply only if the third party thought the agent was acting as principal.
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If the third party didn’t care who they were contracting with, defences generally cannot be used.
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Set-off is a practical example: if the third party owes a debt to the agent/principal, it may deduct it from the amount owed.
Merger and Election
Once the principal is revealed, the third party must choose who to hold liable: the principal or the agent. This is called election.
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Election: The third party is aware of the principal and makes a conscious choice. For instance, if ServerWorld decides to sue NeoTech instead of Alex, it cannot later switch to Alex. The choice must be clear and unequivocal, like filing a lawsuit.
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Merger: If a judgment is obtained against one party, it can prevent later claims against the other party, even if the third party didn’t know the principal existed.
Example:
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A media company, StreamX, contracts with an agent, Mia, to buy advertising software. Later, it is revealed that AdTech Corp is the undisclosed principal. StreamX sues Mia first and obtains a judgment. Even if Mia cannot pay, StreamX cannot later sue AdTech because of merger.
This system encourages third parties to carefully assess and choose who they hold accountable once the principal’s identity emerges. It also shows the commercial importance of clarity and timing when revealing the principal in high-stakes transactions.
Relationship between Principal and Agent
In commercial transactions, understanding the internal relationship between a principal and an agent is crucial, even if your main focus is on dealings with third parties. While much of commercial law emphasizes the contract between buyer and seller, the relationship between principal and agent defines responsibilities, duties, and liabilities within the business itself.
Duties Owed by the Agent to the Principal
An agent has several key obligations:
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Obey instructions and act within authority
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The agent must follow the principal’s reasonable instructions and only act within the authority granted.
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Example: A marketing agent for a fashion brand is instructed to negotiate clothing supply contracts only for the European market. If they try to negotiate in Asia without permission, they breach their duty.
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Duty not to delegate without authority
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Fiduciary Duties
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Agents must act in good faith, avoiding conflicts of interest, and prioritize the principal’s interests over personal gain.
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They must provide full accounts of dealings and cannot secretly profit from transactions.
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Example: An art agent arranging gallery sales must disclose any personal commission received from buyers. Failure to do so could lead to liability.
Case Reference: In FHR European Ventures LLP v Cedar Capital Partners [2014], agents who received a secret bonus were held to hold that money on constructive trust for the principal, emphasizing the fiduciary nature of the agent’s role.
Duties Owed by the Principal to the Agent
Principals also have responsibilities:
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Remuneration: The agent must receive the agreed payment for services.
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Reimbursement: Reasonable expenses incurred in performing duties must be reimbursed.
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Indemnification: Agents acting within authority should be protected from liabilities incurred in performing their duties.
Example: A logistics agent negotiating freight contracts must be reimbursed for shipping fees paid on behalf of the principal.
Principals must also support the agency by providing sufficient goods, information, and reasonable instructions.
Example: A food distributor acting as a principal must supply enough inventory to allow the agent to meet customer demand.
Termination of the Agency
Agency relationships may end due to:
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Completion of task or expiration of term
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Agreement between principal and agent
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Revocation by the principal (unless the agency is irrevocable)
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Death or insanity of either party
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Winding-up or dissolution if the principal or agent is a company
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Insolvency of the principal or sometimes the agent
Example: A sports merchandise agent’s appointment ends automatically when the league season finishes, unless renewed.
Commercial Agents Regulations 1993
The Commercial Agents Regulations provide additional protections for commercial agents in the UK and EU. These aim to balance the relationship between agents and principals, especially where agents have built client bases that principals might otherwise bypass.
Definition: A commercial agent is an independent intermediary authorized to negotiate or conclude sales/purchases on behalf of a principal.
Duties of the Agent (reg 3):
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Act dutifully and in good faith.
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Comply with principal’s instructions.
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Make proper efforts in negotiations.
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Communicate important information.
Duties of the Principal:
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Act in good faith.
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Provide information and documentation needed for the agent to perform.
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Give reasonable notice of business downturns or changes.
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Keep the agent informed about concluded or pending transactions.
Remuneration & Protection:
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Agents are entitled to payment, notice, and compensation if the agency is terminated.
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Neither party can contract out of these obligations.
Example: A renewable energy company hires a commercial agent to negotiate solar panel contracts across Europe. The regulations ensure that if the company decides to bypass the agent after client relationships are established, the agent is entitled to compensation for lost commissions.
Summary:
The principal-agent relationship is built on trust, good faith, and clear duties. Agents have fiduciary obligations, while principals must act fairly and provide support. The Commercial Agents Regulations 1993 offer statutory protection to ensure that agents cannot be unfairly deprived of remuneration or opportunities.
What is an undisclosed principal in agency law?
A person or business that authorizes an agent to make a contract without revealing their existence to the third party.
A third party who secretly participates in a contract without the agent's knowledge.
Can an undisclosed principal enforce a contract once revealed?
Yes, unless the contract or circumstances explicitly exclude the principal.
No, the agent remains solely liable at all times.
Which situation excludes an undisclosed principal from intervening?
When the third party wanted to contract only with the agent personally.
When the agent acted within apparent authority.
If the principal pays the agent, but the agent fails to pay the third party, can the third party claim from the principal?
Not usually, because the third party trusted the agent personally and was unaware of the principal.
Once the undisclosed principal is revealed, what must the third party do regarding liability?
Make an election: choose to hold either the principal or the agent liable.
Must sue both the agent and the principal together.
How does “merger” work once a judgment is obtained against one party?
The other party is discharged from liability, even if the third party was unaware of them.
Both parties remain fully liable regardless of judgment.
Can the third party use the same defences against the principal that they could against the agent?
Yes, the principal steps into the agent’s shoes.
No, the principal cannot be challenged once revealed.
