We recently came across a situation which highlighted the importance of including a no-agency boilerplate provision in commercial contracts, when we had to consider whether a person who revealed itself as an undisclosed principal to such a contract could directly enforce the terms of that contract against another party. The contract did not include a no-agency boilerplate term, and we concluded, on the particular facts that the undisclosed principal had a right to enforce the contract.
Accordingly, we felt that it would be useful, by way of recap, to set out the principles of law underpinning the reasons for a no-agency boilerplate term.
What is Agency?
Agency is a fiduciary relationship which exists between two parties under which one of them (known as the principal) agrees that the other (known as the agent) may act on its behalf, including to enter into contracts with third parties. Agency relationships are capable of being formed by way of express agreement (verbal or in writing) or may be implied from the conduct or situation of the parties.
Disclosed v Undisclosed Principals
A principal may be disclosed or undisclosed.
A principal will be a disclosed principal (whether specifically identified or not) when the principal’s interest in a transaction is known to the third party at the time of entry into a contract. A disclosed principal (whether identified or not) may directly sue and be sued on a contract made by an agent acting on its behalf within the scope of the agent’s authority. If an agent enters into a contract on behalf of a disclosed principal outside the scope of its authority as agent, that contract can also be subsequently ratified by the disclosed principal.
A principal will be an undisclosed principal when such principal’s existence, as opposed to identity, is not known to the third party at the time of entry into a relevant contract - meaning that the third party likely believes that it is contracting directly with the agent. An undisclosed principal, once it discloses itself to the third party, may intervene upon and, consequently, also sue and be sued on a contract made by its agent, acting on its behalf within the scope of the agent’s authority, unless the third party has manifested its unwillingness to contract with the principal or there are other circumstances which should lead the agent to realise that the other party was not so willing to contract with the principal. This principal of agency applies irrespective of whether a contract contains a non-assignment provision (as it not treated in law as an assignment of rights).
Although the exclusion of an undisclosed principal’s right to intervene on an agreement may be established from the circumstances surrounding the agreement, the clearest way to ensure legal clarity on this point is to include a clear no-agency boilerplate provision, along the lines of the following:
“Each party confirms it is acting on its own behalf in relation to the contract and not for the benefit of any other person.”
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.