Undisclosed Principal & Third Party Right under Indian Contract act

Abstract:

This principle of undisclosed principal and rights of third parties as found in the Indian Contract Act 1872 under chapter 10 which discusses Agency. The agency is regulated in terms of the provisions of the Indian Contract Act, 1872 as per the Sections 182 up to 238 which is a significant feature of the law of agency^[1]. It is expressed in Section 182 of the Indian Contract Act of 1872 that says that an agent is a person who is used to perform any action on behalf of another person or represent another person in relation to a third person. The individual upon whom such an act is performed,or whom so represented, is termed the principal. Agency is a transaction and the Indian Contract Act 1872 has much to say regarding this. In some cases, the agent contracts without the knowledge or information of the third party on the existence and identity of the principal. An undisclosed principal is known as such a principal. Even though the term is not explicitly defined in the Act the term undisclosed principal is known, and regulated by numerous agency provisions.

By the general rule of agency, in case an agent does what is within his jurisdiction, the principal is liable to the actions of the agent.This rule finds application in Section 226 that provides that contracts signed by an agent and liabilities incurred by acts performed by an agent could equally be enforced as though the contracts were entered to and acts performed by the principal. This is a section that is the legal foundation of holding an undisclosed principal liable to contract under the agent as long as the latter acted within his jurisdiction. Another issue that arises as a result of this doctrine is that it brings about a number of questions that are associated with the legal aspects regarding the enforceability of contracts and the rights and liabilities of parties that are involved in contract. Issues like whether or not an undisclosed principal can enforce the contract, whether or not the third party can sue the principal on finding out his existence and how the interests of the third party are safeguarded emerge important. These problems are handled by the Indian Contract Act majorly in Section 231 and 232 that acknowledges the rights of the undisclosed principal and at the same time protects the interest of the third party.

Literature Review:

Several legal scholars have discussed the doctrine of undisclosed principal in the Indian Contract Act, 1872 and courts have over time interpreted the doctrine. The literature however is largely addressing the doctrine as an auxiliary aspect of the law of agency, not as a separate field of research of third-party rights. The wide range of the studies and the narrowness of the scholarly interest in this subject can be traced through a review of the available books, written articles and judicial decisions. Given their authoritative status, the doctrine of undisclosed principal was described by Pollock and Mulla^[2] in their authoritative work Pollock and Mulla on the Indian Contract Act, as an exception to the general rule of privity of contract. As the authors argued, even though the undisclosed principal is not an observable contract party, the law permits him to enforce the contract in accordance with the equities existing in favour of the third party. In the commentary, Section 231 and 232 have been identified as the protection, so as to ensure that the third party has not been put in a disadvantaged situation by the non-disclosure of the principal. Nevertheless, the discourse has been more of a doctrine and has not undertaken an extensive analysis of the Indian case laws

In Law of Contract and Specific Relief, Avtar Singh gives a simplified explanation of the doctrine and stresses the commercial significance of the doctrine. He says that the right of the unnamed principal to interfere in a contract is not absolute, but limited in instances where the contract is of a personal kind, or where the personal credit or skill of the agent was of importance. Although the book is conceptually clear, it does not discuss much on the judicial trends in India on the aspect of third-party protection.

In the Law of Agency, R.K. Bangia^[3] emphasizes the practical need of the doctrine when doing business with brokers and commission agents. He argues in favor of the doctrine encouraging the convenience of businesses, but admits that third parties can be uncertain in case of the uncontrolled adoption of the doctrine. His composition briefly refers to judicial principles although it does not involve a case-law examination. Cases in court have been instrumental in determining how the doctrine of undisclosed principal is applied. In Said v. Butt (1920)^[4]The court observed that a person acting as the undisclosed principal cannot intervene in contracts of personal character because he will frustrate the intention of the third party. This case is also used to justify the restrictions in the rights of an undisclosed principal and has been a source of influence in Indian judicial thought.

In Kishorelal v. Girdharilal ( AIR 1945 PC 54 ^[5])An undisclosed principal had his right to sue on a contract made by his agent and the Privy Council (Girdharilal, AIR 1945 PC 54). It was pointed out, however, that such right was subject to all equities and defences that the third party had against the agent. This ruling reaffirmed the rationale that the third party rights should not be biased because of the hiding of the principle. This doctrine has also been developed with the help of Indian High Courts. In Damodardas Khivraj v. Gourishankar Harbakas, ( Bombay High court, 1957 )^[6]accepted the fact that in such a case, where the agent enters into a contract without revealing his principal, the contract seems binding to the agent but the undisclosed principal may only enforce it after taking into consideration the right of the third party who is already in existence. Similarly, in Zakiuddin v. Rajendra Kumar, Madhya Pradesh High Court, 2012^[7] The court also reiterated that the agent can be held strictly liable even after the disclosure of the principal and thus provided security to the third party.

Research Gap:

The principle of undisclosed principal has been identified in the Indian Contract Act, 1872, especially stated in 231 and 232 and, there, there is little specific scholarly discussion of the practical impact of this doctrine on the rights of third parties. The available literature discusses the concept in most cases in the context of the wider law of agency concept, rather than discussing in detail the strike between commercial convenience and third-party prIntroduction:

The doctrine of undisclosed principal takes a special place in the law of agency because section 231-232 of the Indian Contract Act, 1872^[8](ICA) permits an unnamed principal to intervene, enforce or be liable under a contract of the agent, despite the third party thinking the agent was a principal on behalf of the actual principal. Simply put the doctrine of undisclosed principal is a declaration of the existence or identity of a principal at the time an agent acts on behalf of a principal, which is not disclosed to the third party.The doctrine of the undisclosed principal is applied in cases in which the agent does not disclose the existence of the principal and his representative nature. The case of J.Thomas and Co v Bengal Jute Baking co.1978 shows how in case the contract is signed by the agent, yet he is in fact acting on behalf of an unknown principal, the law will consider the contract one involving the third party and the principal which in this instance was specified making the transaction invalid in view of the restrictions in the regulations.

The Indian Contract Act, 1872 states that an undisclosed principal is not mentioned in the contract that is concluded but instead a person on behalf of whom the agent was actually acting. The Indian Contract Act is cognizant of this fact and alters the general principle of contractual privity, which is that a contract only gives rise to rights and liabilities between the parties to the contract, in that, in some situations, the unseen principal may intervene and, by doing so, infringe the general principle of contractual privity. It is applied in cases where the individual who is the principal does not prefer to inform people of who he or she is. The principle has no desire to tell who they are because of certain reasons. As an example the principal does not wish to let their competitors know what the principal is up to. The principal desires to have a deal where there is no involvement of the principal.

By doing so the principal can maintain a profile and the principal may still have what the principal desires. The agent will address people when the agent is performing a serving role on behalf of the principal. Make it appear that they are doing something of their own. The agent will present it as though the contract or agreement is between the agent and the other individual.. It happens to be the principal who will be the beneficiary of the contract. The contract brings the principal what they want. They remain hidden. This is the reason why the doctrine of principal is applied in business quite frequently due to cases such as this which require that the principal should be concealed. Still would still like to get what they desire in the agreement. The one benefiting is the principal and the agent is merely acting on behalf of the principal. Nevertheless, it is possible that uninformed third parties may be disadvantaged by the law in case the law failed to safeguard the rights of such persons. The Indian law, which to a great extent is based on the English common law principles, permits the undisclosed principal to enforce the contracts, as well as to protect the third party against any unfair prejudice. the protection of the rights of the third party.

The Indian Contract Act of 1872 provides the statutory framework of addressing an undisclosed principal in India in Section 231 and 232.

Section 231 that discusses Right of parties to a contract made by agent not disclosed that states that in case an agent enters into a contract with a person who does not know or has no reason to know that the agent is an agent, his principal may demand performance of the contract; however, this is not in exception to the other contracting party. In case the principal reveals himself before the contract is closed, the other contracting party may not discharge the contract, provided that he is able to prove that, had he known who the principal in the contract was, or had he known that the agent was not a principal, he would not have signed the contract. that in case a contract is made by an agent with a person who either does not know or has no reason to know that he is contracting with an agent the principal may demand performance of the contract. But the third party is entitled to all the rights against the principal, as he would have had against the agent had the latter been the principal. In case a principal announces himself before the contract has been completely fulfilled, the third party can decline to perform, in case he can demonstrate that he would not have signed the contract in case he had known the true identity of the principal.

(Section 232) Performance of contract with agent presumed to be principal – “ where a man concludes a contract with another, and is not, or has no reasonable cause to believe is not, aware that the other is an agent, the principal, should he need the contract performed, may only get the contract performed, subject to the right and obligation subsisting between the agent and the other party to the contract. Which also entails that where neither party is aware that they are dealing with an agent, the principal, in his or her enforcing the contract, is bound by the rights and liabilities which already exist between the third party and the agent. As an instance, when the agent was indebted to the third party prior to the concluding of the contract, the principal is not permitted to execute the contract without permitting the third party to offset the obligation.

The reason for such provisions is that there should be fairness: on the one hand, it should be consistent with commercial convenience, and the shareholders should be allowed to remain unnamed, and, on the other hand, the law has to safeguard the innocent third parties not to be disadvantaged unfairly. Section 231 and 232 taken together bring about a balance between legal fairness and commercial flexibility. The way these sections were interpreted by the judiciary has contributed to the perfecting of the doctrine and has facilitated its practice. An English case, Keighley, Maxsted and Co. v. Durant (1901), is one of the most significant cases that assisted in practicing this section, as it was discovered that in case of the agent failing to disclose the principal, the agent himself is liable to the third party under the contract personally, due to the fact that the third party thought that he was dealing with the agent as the principal.

Though there are few Supreme Court cases which are founded on an unknown principle doctrine, in this situation, Damodardas Khivraj v. Gourishankar Harbakas and Another (Bombay High Court, 1957) High Court decisions have been able to apply both section 231 and section 232 of the Indian Contract Act in commercial and agency disputes, the court noted that the third party being unaware of the agency that exists between the two parties, the contract seems to be made between the agent, and the right of the principal can only be exercised under existing rights on the third party against the agent.

Likewise, Zakiuddin v. Rajendra Kumar and Another (Madhya Pradesh High Court, 2012) indicated that in cases where an agent signs an agreement without informing his principal, the agent would remain liable and yet the fact that the principal might be liable at a later time on finding out. The Indian doctrine, then, is a composite of law saying and fair thinking of the judges. It allows individuals who are not openly party to a contract to receive what they are entitled to. It also ensures that the other individual in the contract is not harmed since he or she was not aware of the secret individual. The law also indicates that there are occasions in which it does actually matter who is entering into the contract such as lending money to someone because of trusting him/her. When such cases arise then the individual who is not being openly involved may fail to achieve what he wants of the contract. The Indian doctrine pertains to strike a balance between these things and it is premised on the concept that contracts ought to be just, to all the parties and including the undisclosed principals and the third parties

The doctrine of undisclosed principal under the Indian Contract Act demonstrates how the contemporary contract law modifies the general precepts to fit the realistic business needs at the expense of the vulnerable people. It fills a gap in the theoretical legal doctrines and the real world trading relations so that both justice and commercial efficacies co-exist under agency third-party contracts.

Research Methodology:

The doctrine of undisclosed principal research mainly relies on statutory interpretation of the Indian Contract Act, 1872, particularly, Section 231 and 232 of the Indian Contract Act after which the doctrine of undisclosed principal applies. The research also depends on court decisions that have read and elaborated this doctrine by the Indian law. Documents and records that would be used in this study are the provisions of the Indian Contract Act, 1872 and relevant case laws. Some of the primary sources are standard textbooks, commentaries, journal articles, and legal databases.

The study is descriptive and analytical in nature. It looks at the law of an undisclosed principal and protection by the Indian law to third parties. The research questions that form the basis of the study are as follows: first, is an undisclosed principal capable of enforcing a contract in every situation or is the right constrained by the nature and purpose of the contract; second, to what extent will the interests of contracting third parties that do not know the real principal be met when the doctrine of undisclosed principal is applied by the Indian courts; and third, a balance between commercial convenience and fairness will be achieved by the Indian courts when enforcing the doctrine of the undisclosed principal. The research attempts to offer a systematic perception of the doctrine in practice by employing statutory analysis and case-law analysis.

1. Whether an undisclosed principal can enforce a contract in all circumstances, or whether such right is limited by the nature and intention of the contract?

An undisclosed principal under the Indian Contract Act, 1872, is not an absolute right to enforce a contract in all instances; but is restricted by the nature and the intention of the contract. In spite of the fact that Sections 231 and 232 acknowledge that an undisclosed principal can exercise its right to intervene and enforce a contract accepted by an agent acting under an agency, the Indian courts have always believed that the rule has significant exceptions. In cases where the contract is a personal contract, or where the contract is based on personal trust, skill, credit or confidence vested on the agent, the unknown principal cannot enforce the contract. Though the provision has been written in the English case of Said v. Butt (1920), has been emulated in India to enforce contractual consent. Moreover, when the conditions of the contract clearly or unspokenly point to the fact that only the agent should have been bound by it, there is no place for the principal in the enforcement. In Lakshminarayan Ram Gopal and Son Ltd. vs Government of Hyderabad (1954)^[9]The Supreme Court of India insisted that the actual intention of the parties and the circumstances around it should be looked at and then agency principles can be applied. Other reasons why the enforcement has been refused by the Indian courts are that letting in an undisclosed principal into the contract would result in prejudice to the third party or a fundamental alteration of the foundation on which the contract was signed. Thus, the right of an undisclosed principal to enforce a contract is not absolute but is strictly limited to the situations when enforcement of such a contract is in accord with the nature of such a contract and intention of the parties.

2. To what extent do section 231 and 232 of the Indian Contract act protect interests of third parties who contract without knowledge of the real principal?

According to section 231 and 232 of the Indian Contract Act, 1872 offers a lot of protection to third parties who enter into the contract without awareness of the actual or non-disclosed principle and also does not nix commercial convenience. Section 231 secures the third party by giving him the possibility to provide the undisclosed principal with all defences and rights of set-off that would have been available to the agent had the agent been a contracting party. This will make sure that the third party is not disadvantaged by the fact that the principal identifies himself later when it is too late. In Montgomerie v. United Kingdom Steamship Association (1891)^[10], which was adopted as a principle in the Indian courts, it was held that any undisclosed principal could not deprive the third party of any of the rights and defences held against the agent. This protection is further enhanced under section 232^[11] since the third party has a choice at the time of disclosure of the principal to either enforce the contract against the agent or against the principal.Nonetheless, this right is restricted in cases when it can be demonstrated that the third party would never have signed the contract in case he or she knew who the principal was. These provisions are meant to guard against unfair surprise and guard the reasonable expectations of the third parties Indian courts have stipulated that these provisions are meant to avert unfair surprise and guard the reasonable expectations of the third parties.

So, Sections 231 and 232 have a middle ground so that although undisclosed principals are allowed into commercial transactions, third parties still have rights, remedies, and defence under a contract without being prejudiced by the fact that they have no knowledge of the actual principal.

3. How have Indian courts balanced commercial convenience with fairness

   while applying the doctrine of undisclosed principal?

 The Indian courts have struck the middle ground between commercial convenience and fairness in applying the doctrine of undisclosed principal by taking a pragmatic but equity-based approach. Though acknowledging that undisclosed principals are a normal and essential condition of the current commercial dealings, it has always occurred to the judges that the commercial expediency cannot prevail over the basic principles of agreement and fairness. The Supreme Court in Lakshminarayan Ram Gopal and Son Ltd. v. Government of Hyderabad (1954) ^[12]pointed out that the real nature of the relationship and the intention of parties should be considered instead of mechanically using agency principles. In general, the undisclosed principals have been permitted to enforce contracts by the Indian courts in purely commercial transactions where no aspect of personal trust, skill or confidence is held in, because it leads to business efficiency and trade practices. Nevertheless, in cases where the contract was of a personal nature or the enforcement of the contract would have been unfair to the third party or would have changed the risks initially assumed, the courts have declined to use the doctrine.

The application of the doctrine of undisclosed principal in Indian courts by permitting its application in commercial contracts but prohibiting it in cases of personal dependence or pre-emptive injustice has guaranteed that the doctrine of undisclosed principal is a flexible principle that can be applied to commercial necessity without jeopardizing its fairness and equity and contractual assent.

Conclusion:

The Indian Contract Act, 1872 is a doctrine of undisclosed principal, which is a major facet of the law of agency that is commercially convenient, as well as equitable. The law allows a principal to transact business using an agent without identification which leads to easy and efficient business dealings. Meanwhile, Sections 231 and 232 protect with caution the third party interests who are involved in contracts without any prior knowledge of the authentic principal. Judicial interpretation has seen to it that the rights of an unnamed principal to be enforced by a contract are not absolute but are subject to the nature and intent of the contract especially where the contract is personal, or where the contract is based upon the personal skill, credit, or confidence of the agent. Indian courts have always taken a fair stand where they have given the doctrine to be applied in purely commercial cases, and limited it in cases where enforcement of the doctrine will result in prejudice or cause harm to contractual consent. The doctrine of undisclosed principal, therefore, is a moderated principle of law that encourages efficiency of trade without jeopardizing the element of justice, equity, and reasonable expectations of third parties.

Suggestions:

Undergraduate law textbooks ought to have clearer and elaborated explanations to deeper understanding and practical use of doctrine of undisclosed principle through the use of illustrations and case laws. The approach taken by law instructors should also be to have students read judicial decisions as a way of valuing the practical meaning of the Sections 231 and 232 of the Indian Contract Act. Moreover, more awareness needs to be generated among contracting parties, especially the third parties regarding their rights and remedies in case of dealing with the agents, in such a way that they are not mistreated at the expense of non-disclosure of the principal. These would help in better legal awareness and at the same time such measures would make sure that the doctrine does not lose its effectiveness and fairness in its functionality under Indian contract law.

Reference(S):

A. Primary Authorities

Statute

The Indian Contract Act, No. 9 of 1872, §§ 182–238 (India).

Cases

• Said v. Butt, (1920) 3 K.B. 497 (Eng.).
• Kishorelal v. Girdharilal, A.I.R. 1945 P.C. 54 (India).
• Lakshminarayan Ram Gopal & Son Ltd. v. Gov’t of Hyderabad, A.I.R. 1954 S.C. 364 (India).
• Damodardas Khivraj v. Gourishankar Harbakas, A.I.R. 1957 Bom. ___ (India).
  (Note: Insert correct page number if required.)
• Zakiuddin v. Rajendra Kumar, (2012) ___ M.P. ___ (India).
  (Note: Insert proper citation details if available.)
• Keighley, Maxsted & Co. v. Durant, [1901] A.C. 240 (H.L.) (U.K.).
• Thomas & Co. v. Bengal Jute Baling Co., (1978) ___ (India).
  (Note: Insert full citation if available.)

B. Secondary Authorities

• POLLOCK & MULLA, THE INDIAN CONTRACT AND SPECIFIC RELIEF ACT (LexisNexis, latest ed.).
• AVTAR SINGH, LAW OF CONTRACT AND SPECIFIC RELIEF (Eastern Book Co., latest ed.).
• K. BANGIA, LAW OF AGENCY (Allahabad Law Agency, latest ed.).

^[1] Indian Contract Act, 1872

^[2]Pollock & Mulla on Indian Contract Act & Specific Relief Act

^[3] Indian Contract Act by R.K.Bangia

^[4] Said v. Butt, (1920) 3 KB 497.

^[5] Gridharilal v.Kishorelal AIR 1945

^[6] Damodardas Khivraj v. Gourishankar Harbakas, Bombay High Court, 1957.

^[7] Zakiuddin v. Rajendra Kumar, Madhya Pradesh High Court, 2012

^[8] Indian Contract Act, 1872

^[9] Lakshminarayan Ram Gopal and Son Ltd. vs Government of Hyderabad (1954)

^[10] Montgomerie v. United Kingdom Steamship Association (1891)

^[11] India Act Contract, 1872

^[12] Lakshminarayan Ram Gopal and Son Ltd. v. Government of Hyderabad (1954)